Ebitda – earnings before interest, tax, depreciation and amortisation – was a popular method of calculating corporate valuations back in the dot-com boom and is now widely derided as a means of inflating a company’s worth, while excluding all those nasty costs that erode shareholder value.
The gag circulating the City currently is that the “a” for amortisation should actually stand for auditors. Or even be a capital “A” and stand for Andersen. Auditing – or the lack of it – would seem, in the wake of Enron, WorldCom and Xerox to be the gravest hidden cost and threat to prosperity for western enterprises.
Andersen’s presence as auditor at both Enron and WorldCom is, perversely, all that seems to reassure the markets that the accountancy and auditing profession is not a lucrative occupation for three-card trick hucksters.
I’ve said before that, at some stage over the past half-century, the major accountancy companies metamorphosed from being a dull-but-worthy walk of life for the utterly reliable into a fast-lane financial service, in which racing-thin men and women, with equally thin brief-cases and lap-tops, flew the world as “consultants”.
I’ve long harboured a suspicion that they were focused on their own financial welfare, rather than their clients’. But that’s being wise after the event. If we can’t be wise before the event, we should at least aspire to be wise during the event.
The concealing of losses to make bigger profits at these global companies is something that has happened – and may prove to have happened elsewhere. What we now need to be wise about is where we go from here, rather than wringing our hands about the plummeting dollar and share prices.
Metropolitan liberals (like me) and unreconstructed authoritarian socialists use circumstances such as these to chunter that there is something essentially rotten about the American model of capitalism – too much greed and overriding incentives to achieve earnings growth at, literally, all costs.
As it happens, I do think that the US is isolationist, self-centred and demonstrates some nauseating double standards. My favourite hobbyhorse is that it operates separate anti-trust standards – from airlines to software – at home and abroad.
But, we have to be careful about an argument suggesting there is something destructive at the core of capitalism, just because its greatest exponent is going through some dodgy accountancy experiences.
Sure, capitalism is, by its very nature, exploitative and no one (particularly the bleeding hearts of the bogus fad for “corporate social responsibility”, or CSR) should pretend otherwise. If we don’t pay people less than the value they generate for their companies, then we don’t make profits. CSR people can make us be nice about it, but it’s still true.
To corrupt Churchill’s dictum on democracy as a form of government, capitalism is the worst way to run an economy – except for all the other ways. We have to live with it, make it as good and efficient as possible and that’s where regulation and constant vigilance come in. And, to return to the language of a few paragraphs ago, it is about being wise after events, so that we’re wiser ahead of events.
That sounds a bit like a phrase from a sermon. But there is a practical point to be made that relates to the US, or more specifically its current administration.
Before I make it, let me dissociate myself first from the current political revisionism that’s sweeping the UK political circuit. Where once we were standing “shoulder to shoulder” with our American cousins, an unnamed minister is now indicating that President George W Bush’s administration is “rather unpleasant”.
My dear, they have no manners. And their standards of business! We would never be so vulgar. Well, before we get too pleased with ourselves, let’s just remind ourselves of a few great British enterprises: BCCI, Polly Peck, Mirror Group, and Barlow Clowes.
There are many more. I don’t suggest any criminal activity, but the dot-com boom was full of companies, such as the online fashion disaster area Boo.com, that took a highly cavalier approach to the relationship between costs and earnings.
So I don’t think we can afford to be too snobbish about our American friends, who happen to be strapped for a few billion dollars at the moment. But, that said, I do think there is an attitudinal problem to be addressed.
Whether it is an act of terrorism or an act of financial fraud, Bush’s instinct is to launch an air strike, literally and metaphorically. The language he has deployed since Enron and WorldCom, about aggressively prosecuting wrongdoers in companies, is not a million miles from the language he used to launch his war against terrorism.
Bush is in danger of meeting any kind of crisis with a promise to hunt down its perpetrators like dogs. A little more understanding and a little less retribution are called for. I’m not suggesting that fraudsters should not be punished, any more than terrorists shouldn’t be called to account.
In both instances, there needs to be examination of how we got into these messes in the first place. If Americans don’t learn from mistakes in their financial markets, as in their foreign policies, they are condemned to repeat them.
George Pitcher is a partner at communications management consultancy Luther Pendragon