Tuesday, February 13, 2007

Recipe for cooking the books

Ok, I have to admit I'm getting to the point of being obsessed with stories of companies cooking the books. Enron, Woldcom are two big ones, closer to home Home Gold (Carolina Investors). Two companies that were found with their hands in the pot are Ahold and Computer Associates (CA), but they are still in business (with some bosses in jail).

But one thing seems to keep coming through in all of these cases. If the company had not encountered problems, the crimes would have gone un-noticed. So what crimes are being committed by companies that are still afloat (at least for today)?

Some of the crimes are committed out of ignorance. SEC regulations are sometimes not intuitive. Say you're in business selling wodgets (everyone sells widgets, you want to be different). You notice another company selling wodgets and decide to approach the head. You know, if you two could just agree not to steal each other's customers, you could both make a better profit. When you start trying to steal customers is when profit drops. Seems like a good idea, you shake and walk away.

What was just described is called anti-trust. By restricting competition, you are effectively engaging in price competition. You're cheating the public our of lower prices. It seems right at first, but it's wrong.

So how is this avoided? Or better yet, how does this happen? How do people who don't understand get into positions where they can commit these crimes? I think it's because people want to cut corners. Rather than train people, they just want to throw them in. Rather than hire the right people, they want to hire friends or people that think like themselves. And people outside the company want results, they don't care how they get them (until it falls apart).

Amazing how this all fits together...

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