Cash Flow Forecasting
sufficiently clear fashion to enable a reader of the financial statements
to understand what was going on’. The Powers Report also finds that
Andersen had an integral part as consultants in creating the Raptor part-
nerships, earning nearly $6 million in fees on these and related partner-
The basic question arising from the Enron scandal is whether accounting
statements can be required to reflect the true economic condition of the
companies. In many companies, including Enron, there was at best a
pretence of this, and often not even that. Perhaps the best overall
reform, as Partnoy (1999) suggests, might be to adopt legislation to make
corporations, their officers and their directors legally liable should the
general requirement that disclosure must reflect the economic reality of
a company be violated. Treasury Secretary O’Neill has proposed that
executives should not be allowed to have insurance to cover any such
liability, but few believe the White House will support his rather off-the-
It is therefore important to bear these realities in mind when number-
crunching a spreadsheet, and wondering about the true significance
behind a change in an inventory turnover ratio from 57 to 64 days or the
speed-up in days’ receivables from 37 to 34 days.
The purpose of company financial information is to enable effective credit
decisions to be made, so that costly lending errors can be avoided. It is
important therefore that information is reliable. Consider the essential
information that is obtained directly from members of senior management,
such as the CEO or finance director. How reliable is this information?
In Enron, for example, the Senior Manager was Kenneth Lay and the
Finance Director was Jeffrey Skilling, who in his testimony to Congress suf-
fered from an acute loss of memory most atypical of a normal CFOs per-
formance (he repeated ‘I do not recall’ 28 times during his testimony).
Despite the fact that 27 Enron managers have been charged with fraud and
9 have pleaded guilty, Lay and Skilling have yet (as of February 2004) to be
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Summary of financial statements
brought into court on charges related to Enron’s implosion (Houston
Chronicle, 13 February 2004). In Europe, such CEOs have included Asil Nadir
(following the collapse in the 1990s of the publicly quoted company Polly
Peck Plc) and Ruiz-Mateus of Spain. Following the collapse of Polly Peck,
Nadir sought refuge in the illegitimate state of Turkish North Cyprus, from
where he cannot be extradited for having perpetrated corporate fraud in
Likewise, Ruiz-Mateus absconded to Argentina while the Spanish
government combed over the ashes of the collapsed RUMASA group.
In Italy, Parmalat hid a 15 billion euro ‘hole’ in its accounts from its
auditors for 10 years by providing a forged photocopy of a deposit cer-
tificate with the pasted-on logo of an offshore subsidiary of a US bank.
It begs the question, what sort of audit guidelines did the company have
in its audit procedures manual, and were they being followed or not?
It is normal to consider how accurate such information is likely to be
both during a best-case scenario (inflating corporate performance to
please share and rating analysts) and in a worst-case scenario (hiding the
fraud). Moreover, it is worth considering whether the company’s audit-
ors are colluding in the fraud in an effort to retain profitable business
and indeed sell more profitable ‘consulting’ business (for example,
many of the fraudulent mechanisms present in Enron were designed by
Andersen, its auditors, and the supporting documentary evidence was
destroyed by Andersen after it received a subpoena from the Securities
and Exchange Commission).
Asil Nadir, the Polly Peck tycoon who fled to northern Cyprus in 1993 to avoid charges involv-
ing theft totalling £34 m, yesterday astonished friends, Turkish politicians and the serious
fraud office by pledging to return to Britain to clear his name. (Nils Pratley, The Guardian,
3 September 2003)
Peter Gooch, Valencia Life Magazine.
The Commission’s complaint, filed in the US District Court in the Southern District of New
York, alleges that Parmalat engaged in one of the largest and most brazen corporate financial
frauds in history (SEC Litigation Release No. 18527, 30 December 2003). After fraudulently cer-
tifying 8 billion euros ($10 billion) in assets in their company’s balance sheet, Parmalat entered
bankruptcy protection last week and founder and former CEO Calisto Tanzi fled the country. He
subsequently returned and was immediately detained by police. The scandal and its aftermath
continue to unfold, and Parmalat is being called ‘the Europe Enron’ for its massive fraud and
illegal business practices (see the forged deposit certificate in Annex 6.1 to the Release.
FT.Com, Q&A: ‘Enron finds itself in a Washington circus’, Adrian Michaels, Gerard Baker and
Peter Thal Larsen, 13 February 2002.
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