Asia and Europe: Holding Breath for Accounting Scandals

The accounting scandals of US corporations, which have shocked America, show signs of spilling into Asia and Europe. The financial crisis from 1997 to 1998 considerably reformed Asia in terms of restructuring corporations and financial institutions. But accounting practices in that region still needs overhauling. Therefore, experts point out that it is highly probable that Asia may detonate another accounting scandal.

Citing the internal report of Standards and Poors Co. (S&P), the Financial Times published on July 14, 2002, that Japanese financial institutions, which have sustained gigantic bad loans, have manipulated its books. The Japanese banks have bloated their profits through speculative swapping in order to cover up their losses from uncollected debts.

The institutions suspected of illegal accounting practices are four major ones: Misuho Financial Group that has the largest size of assets in the world, MTFG, SMBC and UFG. S&P determined that those banks took advantage of the loophole in the Japanese legal system regarding “interest swapping” (i.e. a new derivative) in order to boost the sales volume on the book. Using the legal practice, Misuho, MTFG, UFG and SMBC over-booked their sales volume by 27%, 158%, 80% and 21%, respectively.

Experts, who participated in the Forum for Transparency of Corporations held in Singapore on July 14th, estimated that the number of corporations engaged in the illegal accounting practice would reach somewhere between 5,000 – 10,000.

A researcher at the ADB indicated, “US corporations just manipulated their profits. It’s more serious for their Asian counterparts. They would not disclose their profits, to begin with.”

An economist worried, “Major Asian corporations are audited by branches of US accounting firms. But the firms do not intervene in their branches’ operation. Thus, there is more room for manipulation.”

In Europe, the media and telecommunication industry is the target of suspicion. The industry had gone through heated fever of M&A in the late 1990s. In the process, the companies in that industry may have engaged in window dressing.

The Le Monde reported that Vivendi practiced accounting manipulations. It is the largest media group in Europe and, in the early this month, witnessed its chairman step down due to burgeoning debts. According to the report, in order to scale down its debt of 29 billion euro, it illegally sold its stocks of B Sky B and bloated the proceeds to 1.5 billion euro.

Experts predict that next week’s profits’ reports in the second quarter by Deutshce Telecom and France Telecom will tell in which direction the window-dressing scandal may proceed.

The two companies, each of which represents its country’s telecommunication industry, has been suffering heavily from excessive M&As. Therefore, both of them had to pay higher salaries and, consequently, has run up huge debts (67 billion euro and 60.7 billion, respectively). Thus, their CEOs are expected to be ousted in the very near future.

Mi-Kyung Jung mickey@donga.com