SGV partner in tatters, fights for its future

The question, according to an article in The New York Times is, "is time running out for Arthur Andersen & Company?" Andersen is the international partner of top local accounting firm, SGV & Company. Andersen's current problems are on account of the collapse of Enron. Andersen was Enron's auditor and is now under investigation for having allowed questionable transactions.

The Times article entitled A Tattered Andersen Fights for Its Future observed that "more seriously for a firm that lives and dies by its reputation, Andersen’s name is in tatters. The Enron crisis is only the latest blow to a firm that has suffered repeated allegations of impropriety over the last five years." The same article reported that "last year, it paid a $7-million fine levied by the Securities and Exchange Commission, the largest ever assessed against an accounting firm, for allowing fraud at Waste Management."

Andersen was also involved in a noisy divorce with its consulting arm, now a totally separate company called Accenture. The corporate divorce made Andersen a middle-tier accounting firm, the smallest of the so called Big Five. "Things look very bleak for Andersen," J. Edward Ketz, associate professor and director of the M.B.A. program at Pennsylvania State University told the Times. "There’s a chance that they go under on this one."

At the crux of Andersen's problem is the question of conflict of interest that is inherent in the operations of the big accounting firms that also run consulting services. The firms face an inherent conflict of interest because most of their profits come from lucrative consulting services, not auditing. As a result, they are reluctant to force clients to change questionable accounting practices for fear of losing the consulting business.

Joseph F. Berardino, Andersen’s chief executive, told Congress that his firm had made an "error in judgment," allowing Enron to use a partnership run by its former chief financial officer to move debt off its balance sheet. The disclosure that Enron’s debts were far higher than Enron had disclosed was a crucial factor that led investors and Enron’s trading partners to refuse to lend to it or do business with it, leading to the collapse.

But according to the Times, the most serious question about Andersen’s behavior, so far, concerns the admission it made on Thursday that it had destroyed Enron documents, which included both paper and electronic records. Andersen started destroying Enron evidence in September and continued through November. Andersen is facing Congressional investigations, a federal criminal inquiry and lawsuits from shareholders that could cost it billions of dollars.

I am not sure if SGV is just an Andersen affiliate or if it is in fact, owned by Andersen itself. I suppose what happens to the mother company in America will affect SGV here. On broader matters, however, it is also appropriate for our Congress to consider legislation that would prevent such conflict of interest situation for accounting firms to cause problems here.

For one, a proposal in the United States opposed by the big accounting firms, including Andersen, that would prevent them from offering consulting services to their audit clients now seem to have a lot of merit. Let the accounting firms stick to accounting and auditing. Management consulting should be considered a separate field that is off limits to accounting firms.

A number of large failures here, including Victorias and Ramcar, had SGV as their auditor. The local SEC must watch developments in the US, specially with regard to new regulations that will make financial statements more transparent and easily understood by investors. From years of covering business, there is the general impression that accountants are able to produce the kind of accounting statements they and their clients want.

An article in the website of CNNMoney says as much. "Regulators said such cases are becoming all too common in an increasingly cutthroat atmosphere where client pressure to make sure the numbers add up often leads to ethical breaches."

A former corporate accountant told CNNMoney that "accountants don’t have that sensitivity. They don’t have the sense that numbers hurt." The CNNMoney source explained that accountants, "early on in their career learn to shave the truth."

After Enron, and Ramcar, the rules of the game simply must change because numbers, fraudulent numbers do hurt a lot.

Good fit?

Just as I thought, the visit of Japanese Prime Minister Koizumi is designed to explore the possibility of signing a free trade treaty between our countries. Over the weekend, the Japanese official actually signed such a bilateral agreement with Singapore. This is one way by which Japan could stay ahead of China in the lucrative ASEAN market.

For our part, Trade Secretary Mar Roxas thinks the proposal for a free trade agreement is interesting. He pointed out that Japan does not have an agricultural sector that could overwhelm the Philippine agricultural sector. On the contrary, our agricultural exports like mangoes and bananas will have a leg up over those from Latin America.

Mr. Roxas also said electronic imports from Japan would also not be a problem since the Philippines already has substantial electronics exports to Japan in the form of semiconductors. At the same time, the country has substantial purchases of various electronic products from Japan such as television sets, stereo components, etc.

A free trade agreement with Japan will give Japanese carmakers a big advantage over the Koreans, the Europeans and the Americans. It will also encourage Japanese manufacturers to maximize their facilities in the country or even expand. Looks like a winning formula for both countries. I wonder how fast it will take for them to negotiate and sign such an agreement?

The thing to watch with Japan these days is the exchange rate of the yen to the dollar. If it continues to slide and goes below a threshold level of ¥140 to the dollar, China may devalue the yuan to remain competitive. If that happens, other Asian currencies will be affected. Malaysia's Prime Minister Mahathir already warned that he might be forced to drop the peg of the ringgit if that happens.

That will mean another peso devaluation, one that is not of our making. And just last Thursday, BSP Governor Paeng Buenaventura seemed confident when he told us that the peso should be stable at current level for most of this new year. Yen willing, he should have added.

Truth wins

Reader Coleen Lim contributed this one.

A wife was using her automatic-teller-machine card for the first time but the bank machine rejected it and flashed a message warning of a ‘bad’ code number. "I thought you used your birth date for your secret number," her husband said.

"I did," the wife replied sheepishly, " but I lied about my age, and I don’t remember which year I used."

(Boo Chanco's e-mail address is [email protected])