"It's amazing I won. I was running against peace, prosperity, and incumbency." - George W. Bush, June 14, 2001 (speaking to Swedish Prime Minister Goran Perrson, unaware that a live television camera was still rolling)
When the story was sent to me about the new accounting rules, that allow corporations to legally misrepresent their financial picture to lure unsuspecting investors, I've been reading everything I could find on the subject, even going out and buying forensic auditor Al Rosen's new bookSwindlers. And the story is an alarming one. Rosen starts out by saying:
Judging from the stories that run in the newspaper, you probably think that Canada is a pretty safe place to invest your money. After all, we just survived one of the worst economic downturns since the Great Depression. Some of the biggest names in the world of banking and finance have disappeared, but not a single Canadian bank collapsed*. Canada must be doing something right, right?
If you believe that, we have some bad news. The risks you take by investing in Canada have never been greater. And the so-called protection that Canadians think they receive from regulators, lawmakers, and auditors has never been weaker.
The bluster over tackling white collar crime with stiffer sentences, was all for show. Stephen Harper and Jim Flaherty have removed all stumbling blocks that prevented corporations from playing fast and loose in the market place. And this is not simply about wealthy people risking some of their bags of gold, but it effects anyone whose savings or pensions are tied up in mutual funds.
Jim Flaherty has always been a gambler. He gambled with sub-prime mortgages and AIG. He's gambling with derivatives, something Warren Buffet refers to as "Weapons of Mass Destruction". And he's using a Goldman-Sachs employee to handle the impending disaster.
Now he's gambling with allowing the falsification of documents to help the corporate sector potentially destroy our once sound financial system.
Flaherty and Harper are Canada's answer to George W. Bush. According to Rosen:
When Enron collapsed under the weight of it's own corruption, 85,000 people lost their jobs and any avenue to collect severance or pensions they had paid into. And instead of toughening the laws, the Harper government has broken down the barriers to more corruption.
Corporate lobbying power and the absence of an organized investor voice in Canada means that most regulatory actions favour corporate interests. Canada is the only major country in the world that allows the same people who audit public companies to financially control the process that sets the auditing rules. This basic and fundamental conflict of interest means that auditors can set rules that cater to their paying corporate clients over the needs of investors.
There's a lot of money involved in these financial cons. Based on our extensive experience with auditor negligence and executive dishonesty, we estimate that investors have lost hundreds of billions of dollars to scams in Canadian financial markets. Even if you haven't invested a penny in the stock market yourself, these losses affect you. Anyone who collects a pension, saves for his children's education, or simply pays her taxes like an honest citizen suffers from the disinterest of our regulators and lawmakers in prosecuting dishonest corporate executives, aided by acquiescent auditors. (1)
Thanks to our self-regulated auditors, Canada will soon adopt** new accounting and auditing standards called International Financial Reporting Standards (IFRS). Under IFRS, corporate managers will have even more freedom to distort and manipulate their financial reports to make themselves look better than they really are. Despite the devastating impact it will have on investors and the utility of financial statements in general, auditors succeeded in pushing through the change because of complete disinterest from lawmakers and a lack of recognition by investors that auditors have no interest in upholding their needs. Canadians simply assume that a self-regulatory body like the auditors would look after public interests, not just their self-interests. (1)
Being Honest Costs too Much
The fact that Enron was able to commit fraud on such a level was through having friends in the White House. Not only George Bush, who received millions in campaign contributions from them, but also his appointed Secretary of the Army, Thomas White.
The indiscretions of former army secretary Thomas White (2001-03), the vice president of Enron Energy Services before his appointment by President Bush, include actions he took after joining the administration—such as conducting eighty-four meetings and phone calls with Enron while in office, many taking place before he divested himself of Enron stock and in the weeks after September 11, when one would have thought him busy with other matters. .... According to the Washington Monthly, Enron booked profits up-front from multiyear deals made during White's tenure as vice president over Enron's Energy Services, which allowed executives like White, "whose bonuses were tied to performance, to collect millions of dollars before the company had realized any profit."
Jeff Skilling, succeeding to the CEO position after Ken Lay, was most proud of convincing the SEC to allow Enron to count projected earnings from long-term energy contracts as current earnings, despite the possibility that the money wouldn't be collected for as long as twenty years, if ever. This enabled Enron to meet analysts' estimates at will by claiming future revenue as current revenue whenever the company needed it. (2)
And this is exactly the kind of practice that the Harper government has now made legal. And Canadian auditors and corporations are lining up, hoping to cash in at the expense of the vulnerable. They claim that being honest is far too expensive.
The main reason that auditors pushed through the change was for money. They are in the process of raking in untold millions for switching all public companies over to the new accounting rules. And the auditors do not bother mincing words about it either. They plainly state that continuing to maintain Canadian accounting rules is "no longer cost effective" for them. After all, since they no longer have any incentive to act on behalf of investors, why take on the added cost to maintain and improve accounting standards at the annoyance of their paying corporate clients?And though Harper and Flaherty are behind the changes, Rosen also lays some of the blame for this potential financial tsunami on an "uninterested and conflicted media." But then the corporations who own 99% of our media, are hardly going to risk losing such a gift.
In a move that's the envy of capitalists everywhere, the auditors turned what was previously a cost centre into a very lucrative profit centre. And they now have their sights set on converting non-public companies and private enterprises to IFRS. Auditors just continue printing money at the expense of investors and business owners for no discernable benefits in return.
*Courtesy of 125 billion dollars from the Canadians taxpayer. Hush money so they didn't blow the whistle on Flaherty's sub-prime mortgage scheme.
**Came into effect on January 1, 2011
1. Swindlers: Cons and Cheats and How to Protect Your Investments From Them, By Al Rosen and Mark Rosen, Madison Commerce, 2010, ISBN: 978-1-897330-76-0, Introduction
2. The Book on Bush: How George W. (mis) Leads America, By Eric Alterman and Mark Green, Penguin Books, 2004, ISBN: 0-670-03273-5, Pg. 67