Page 125 - (DK) The Business Book

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MAKING MONEY WORK 12 3

Major accounting misconduct was
unearthed by US company Caterpillar
Inc. in a Chinese business it purchased
in 2012. Irregularities included
overstated profits and falsified stocks.

sheet and may encourage it to
expand beyond its means. All it
takes is a fall in the stock market for
this valuable shareholding to
become worth considerably less.
Myddelton suggests that it is better
to use “historic cost” accounting
than “mark to market,” since this
provides a more stable set of figures;
it values assets at their cost at time
of purchase, minus any depreciation
that has taken place, rather than at
their current market value.
The argument of rigid rules 2013 Caterpillar said it was writing countries in which it operates have
vs. looser-based principles will be off $580 million from the value of no legislated cap on interest rates,
heard repeatedly when the merger ERA, thereby virtually admitting so the directors are playing by the
talks between the US’s rules-based that the purchase was a complete rules. However, a report by the UK
GAAP system and the IFRS waste of money. Caterpillar then Citizens’ Advice Bureau in 2013
become serious. Even though the accused the previous management stated that three out of four “payday
IFRS is far more rule-based than at Siwei of deliberately creating loan” customers struggle to repay.
its predecessors, it retains a greater misleading accounts, but let the In contrast to the UK, countries
reliance on principles than the matter drop in May 2013 when a such as France and the US have
US’s GAAP system. financial settlement was reached. rules that set maximum interest
In other circumstances, directors levels for consumer credit loans.
Ethical conduct can find solace in the rules. Ultimately, no set of rules can
Whether rules based or rooted in Operating in South Africa, Canada, substitute for ethical behavior
principles, no accounting methods and Europe, short-term money- nor safeguard the system from a
can prevent a deliberate attempt lender Wonga.com sets its annual determined attempt to manipulate
by directors to mislead. In June percentage rate (APR) on “payday accounting figures in a misleading
2012, for example, US construction- loans” as high as 5,800 percent. way. In the hands of principled
equipment giant Caterpillar Inc. This is perfectly legal because the accountants, flexibility within the
completed a $650-million purchase rules is useful; but if someone seeks
of Chinese company ERA Mining to gain huge financial advantage
Machinery Ltd. and its wholly no matter what, that flexibility will
owned subsidiary Zhengzhou enable him or her to do so, even
Siwei Mechanical and Electrical if this entails acting immorally.
Equipment Manufacturing Co. Rules help to ensure that
Mark-to-market accounting
This was part of Caterpillar’s companies operate at an acceptable
is like crack. Don’t do it.
long-standing strategy of growth Andrew Fastow minimum standard. The argument
in China. Unfortunately, a series of revolves around where this standard
US former Enron executive (1961–)
black holes in Siwei’s accounts lies, balanced as it is between useful
soon emerged, including the standards and costly overregulation.
discovery in November 2012 that Rules also encourage those with
the company did not hold the stock ethical principles to go further
levels it had claimed. In January than the minimum. ■