Irish market not immune from corporate fiascos

BUSINESS OPINION: It is tempting to think that the sort of disaster that has overtaken Worldcom could not befall the happy band of companies that make up the Irish Stock Exchange. But the reality is that one already has. Twice in fact.

Two of this year's more spectacular global corporate calamities have involved Irish companies. Elan has taken a pasting over its accounting policies in the wake of the Enron collapse. It now faces a barrage of law suits from investors claiming it used a number of rinky-dinks to inflate profits. The company has dismissed the suits, but rebuilding its reputation is now a major challenge for Elan.

AIB was the victim of a $691 million (€712 million) fraud at its US subsidiary, which has been blamed on John Rusnak, one if its foreign exchange dealers. The affair highlighted very serious corporate governance deficiencies at the bank and it has not ruled out legal action against its auditors PricewaterhouseCoopers.

Elan and AIB may only be two companies. but when you consider the size of the Irish stock exchange, we are disproportionately represented in this year's list of global corporate disasters. Perhaps we should be asking ourselves if there might not be something amiss in the way we approach corporate governance here.

More importantly it might not be a bad time for a corporate health check on our larger quoted companies. A quick ring around of analysts in Dublin indicates that apart from the obvious issue about Elan, there is no company that sticks out as an accident waiting to happen - not that Worldcom did either.

There are few worries about the banks, despite AIB's problems, and companies such as CRH and Kerry, with their relatively straightforward business models, are also not seen as giving any cause for concern.

A number of companies have come in for renewed scrutiny in these more cautious times, but again none have set the alarm bells ringing. The issue that attracts most attention is departures from standard accounting procedures in a way that has a significant impact on profits.

One such company is IFG, the financial services group, which departed from the requirements of the Companies (Amendment) Act in the way that it valued its investment in endowment mortgages. The upshot of this was to boost profits by €4.2 million in 2001. The company has subsequently indicated that it is to get out of this line of business, rendering moot the debate about the validity of its approach.

Another company that has disclosed a departure from normal accounting practices in its accounts is Independent News & Media. The group did not follow normal procedure when it booked a €32.5 million profit from the merger of its Australian and New Zealand interests last year. The decision reversed a loss after tax and financing costs into a profit of €3.1 million. The company has stoutly defended its decision and points out that the issue is fully disclosed in its accounts.

Similarly, the company also disclosed that it was not consolidating its share of the €36.6 million lost last year by its 50 per cent owned cable subsidiary, Chorus Communications Limited. To do so would have dramatically altered the bottom line.

Questions have also been raised about Ryanair's accounting policies by Easyjet, its smaller rival. Easyjet claims that its more successful rival adopts a depreciation policy for its aircraft that flatters profits. Needless to say Ryanair's response was robust, and house broker Davy points out that even if Ryanair accounted for its planes in the same way as Easyjet, its margins would remain at close to double those of its smaller rival.

Waterford Wedgwood's accounting policies have also given rise to some debate. The company changed some accounting estimates in its interim accounts, which in turn added €15 million to operating profits.

Although what it did was fully compliant with UK and Irish GAAP, it did raise a question about the quality of reported earnings, according to broker ABN Amro. It is also important to remember that what Waterford Wedgwood did was fully disclosed in the accounts.

There have also been comments recently about the way that Riverdeep accounts for the sale of its software products, but it is not seen to be a serious issue. Elsewhere in the tech sector the situation for some companies is so obviously desperate that no amount of clever accounting can hide it.

Generally speaking the tech companies are all relatively new and as a result their balances sheets are uncomplicated.

It would appear then that there is no real cause for concern, but at the same time there is no reason for being complacent about the Irish market.

As AIB found to its cost, it is very hard to defend yourself against fraud from within, particularly if your internal controls are lax. But the chances of another Rusnak-type fraud occurring must be falling, given that the Central Bank has told all the licensed banks to audit their internal controls and report back shortly with the results.

But the real reason for Irish investors to remain on their guard is that Irish companies are under exactly the same pressures to please the market as Worldcom. The relationship between the pressure to produce the goods and companies playing fast and loose with the rules is obvious. Equally obvious is the relationship between the rewards that flow to companies and their executives, which keep the market happy, and the decision to commit fraud.

Similarly, the Irish accountancy profession is under the same sort of pressure to comply with its clients' wishes as that under which Andersen buckled. To date there is no reason to believes that the companies listed on the Irish market have strayed beyond the boundaries of what is legal or misrepresented the true state of their finances, but as they say on the share prospectus, past results are no guarantee of future performance.