THE MARXIST REVIEW OF BOOKS
Terry Smith's Accounting for Growth has caused uproar by exposing
the way in which British businesses massage their profit figures. Phil Murphy
sees the scandal as a sign of desperate times for capitalism in this country
The profits of doom
On 12 August, City investment house UBS Phillips & Drew suspended Terry
Smith, the head of its UK Equity Research department. It also took out an
injunction in an unsuccessful attempt to ban his new book, Accounting
for Growth. In an internal memo, dated 13 August, UBS P&D said the
suspension was 'for disciplinary reasons arising from the need to investigate
apparent serious breaches by Mr Smith of his duties to UBS Phillips &
Drew and breaches of certain well-established internal procedures in connection
with the proposed publication of the book Accounting for Growth'. Terry
Smith's book has since been at the centre of a public furore.
- Accounting for Growth: Stripping the Camouflage from Company
Accounts, Terry Smith, Century Business, £19.99 hbk, £12.99
Accounting for Growth reveals the way in which many of Britain's
biggest companies use accounting techniques to inflate their reported profit
figures and earnings per share. Smith is at pains to point out in his introduction
that he is 'not suggesting that the practices analysed are illegal, or even
that they contravene Generally Accepted Accounting Practice' (pvi).
His point, he says, is to expose the resulting deceptions about the well-being
of the companies involved.
At the practical level the book is designed to advise investors and others
as to how they can identify and avoid the corporate disasters which creative
accountancy can disguise. The meat of the book sets up a guide to investors,
so that they are less likely to be 'caught up in the gloss of the annual
accounts and can separate "profit" from cash'(p6).
Smith's use of inverted commas around the word 'profit' captures the essence
of his case: that by massaging the figures, British firms can make profits
on paper which may not exist in reality. Smith itemises 12 'financial engineering'
techniques by which companies and their accountants enhance profit and loss
accounts to give investors the impression that a company is doing much better
than its real trading record justifies. One of the most illuminating sections
of the book is the accounting health checklist of over 200 British companies,
indicating which camouflage methods they employ. This is known as the 'blob
These creative accounting techniques involve, for example, crediting the
potential profits from long-term contracts immediately, long before the
profits are realised. This was a technique used by the computer leasing
firm Atlantic Computers. It collapsed in 1990, the final nail in the coffin
of the conglomerate British & Commonwealth.
Another method involves writing down (ie, deliberately underestimating)
the debt owed to and the stock values of a company which is taken over.
If the new bosses later sell off the stock for more or get their debts repaid
at a higher level than their figures suggested, their future profit earnings
are artificially enhanced. Coloroll, the home products group, used this
technique when it took over the John Crowther Group in 1988. Despite showing
profits in 1989, Coloroll went into receivership in 1990. Other companies
which were able to report profits just before going bust include Maxwell
Communications, BCCI and Polly Peck. The list of firms featured in Smith's
blob guide which have now collapsed is growing all the time.
The controversy following the attempted ban on Accounting for Growth
has focused on the independence and impartiality of stock market research,
following the rapid expansion of the financial services industry in the
1980s. After the City's 'Big Bang' in 1986, brokers and banks were allowed
to merge to form much larger, integrated financial institutions. For the
first time too, foreign investment houses from America, Canada, Japan and
Europe were allowed to operate on the London Stock Exchange alongside British
firms. Union Banque Suisse's acquisition of the brokers Phillips & Drew
was one of the many new hybrid creations.
Because a single firm, like UBS P&D, can now combine a corporate finance
office and a stockbroking department, concern has frequently been raised
about potential conflicts of interest. Investors who are advised by a broking
operation to purchase certain shares have often expressed fears that such
advice may reflect pressure exerted by the corporate finance wing of the
same firm, if it is involved in organising an issue of those shares.
So-called Chinese Walls exist within these firms supposedly to prevent the
different departments influencing each other. But it is generally recognised
that investment analysts like Terry Smith face subtle and not-so-subtle
pressure to swallow any doubts they may have about a share rights issue
being arranged by the finance department. This serves to deflect criticism
from the company they are analysing, and helps to retain them as lucrative
As Smith now sees it himself: 'The Chinese Wall fell on me.' Some of UBS
P&D's clients and their accountants may have been behind the attempts
to ban the book so as not to have their own shady operations thrown into
the light. But the significance of the furore surrounding this book goes
well beyond the internal politics of the financial sector and the accountancy
One intriguing twist in the Smith affair is that the book is not news to
UBS P&D and its corporate clients. UBS P&D published, under its
own name, many of Terry Smith's exposures of creative accounting techniques
in a January 1991 report which was also entitled Accounting for Growth.
The original report was sent to UBS P&D's institutional clients at the
time. It aroused so much interest in the financial community that it was
voted the best piece of research published during 1991 in the Extel survey
of institutional investors. Earlier this year, UBS P&D gave permission
to Terry Smith to publish an updated and extended version of Accounting
for Growth. Yet, having done so, Smith has been suspended and his book
has become a subject of bitter controversy in the financial sector. Why?
The change of attitude towards Smith and his book reflect changed perceptions
of the state of the British economy. Up to a few months ago most economic
commentators and forecasters still believed that economic recovery was just
around the corner. But, after all their firm predictions of an upturn over
the past 18 months have come to nought, a mood of gloom and doom has set
in. Businessmen, bankers and economists are now saying they can see no recovery
well into the 1990s. Comparisons with the Great Depression of the 1930s
are becoming more common.
It is in this climate of slump that the consequences of Smith's book are
so damning for the British economy. Not only does it question the viability
of many British companies today; it effectively denies that there was ever
a real recovery from the last recession at the start of the 1980s. And if
that is so, then it would be more accurate to say that today's recession
started as long ago as the late 1970s, not the late 1980s.
Much of the profit produced during the supposed boom of the eighties was
'manufactured' by sharp accountants playing with figures, not by industrialists
producing and selling things profitably. In his new book, Smith explains
his motivation for co-authoring the original report: 'We felt that much
of the apparent growth in profits which had occurred in the 1980s was the
result of accounting sleight of hand rather than genuine economic growth.'
In the late eighties UBS Phillips & Drew was among the many City institutions
whose favourable reports on the British economy sustained the government's
hype about an economic miracle. As proof, they pointed to a steady rise
of company profits of about 20 per cent a year from 1981 to 1988. Even this
year - three years into the recession - UBS P&D have forecast a resumption
of profit growth of about eight per cent as a sign that things are not wholly
bad for Great Britain plc. The republication of Smith's exposures tears
away any credibility from such forecasts.
This book represents much more than a critical description of the ingenuity
of corporate treasurers and accountants. It confirms the long-term bankrupt
character of British capitalism. The issue is not the legitimacy or otherwise
of creative accounting techniques, but the fact that British industry needs
to resort to the sort of spurious financial activity which spawned such
methods. In the absence of being able to produce profitably, the vast majority
of companies have had to turn to credit-funded survival measures
and the subsequent juggling of figures. Behind the manipulation of the profit
and loss accounts through takeovers, asset stripping, foreign exchange transactions
and hiding loan interest payments lies the reality of what British capitalism
became during the eighties - a 'casino economy'.
The original Accounting for Growth report had already identified
the paper character of the eighties boom in an appended 'aside'. After a
section highlighting pension fund chicanery (long before the Robert Maxwell
affair broke), the authors wrote: 'It can be argued that the excellent performance
of UK equities over the last 10 years is due to the strong progression in
earnings per share growth, which in part is due to some of the accounting
techniques discussed in this review. This has allowed a reduction in pension
fund costs which in turn further boosts earnings per share performance,
thus allowing the argument to become circular' (p15-16). What this means
is that much of the supposed worth of British industry is made up of millions
of bits of financial paper which keep circulating around.
The irony of the Terry Smith affair is that it coincides with the beginning
of the end for the one true success story in the British economy - the financial
services industry. City of London earnings were a real boon for British
capitalism over the last decade. City institutions were not creating any
real wealth either. But they did cream off fat commissions from industry
for arranging the sort of financial scams which Smith alludes to in his
book. Now that even these measures are unable to keep British industry alive,
as evidenced by the continuing growth of corporate closures and the falls
in corporate credit levels, time is running out for the UBS P&Ds of
the City of London, too. Smith's move to jump ship, go independent and make
as much as he can from his book looks like a shrewd bit of timing.
The recent offerings from the radical intelligentsia reveal that there
is no longer any such thing as a left alternative, argues Adam Eastman
Socialism after Stalinism
Books discussed in this article include:
With few exceptions, the trend of the twentieth century has been for the
left to become increasingly marginal. From a highpoint of the 1917 Russian
Revolution and the few short years before the Soviet Union's isolation bred
decay, the trajectory has been downwards. Even in periods such as the thirties
when the left enjoyed some popularity, a growth in numbers disguised a weakening
of ideas and a lack of any real vitality.
- After the Fall: The Failure of Communism and the Future of
Socialism, Robin Blackburn (ed), Verso, £29.95 hbk, £10.95
- Moments of Decision: Political History and the Crises of Radicalism,
Stephen Eric Bronner, Routledge £40 hbk, £12.99 pbk
- The Revenge of History, Alex Callinicos, Polity,
£35 hbk, £9.95 pbk
Since the defeat of the Russian Revolution, the typical response of the
left to its unpopularity has been to try to make itself more palatable by
watering down its politics and making concessions to the status quo. But
in the long run this has only contributed to the left's decline as an independent
force. A bold statement of the anti-capitalist aims of the working class
movement became almost an embarrassment as the left wrapped itself in the
respectability of state intervention, anti-Nazism and 'popular fronts'.
If the century has taught us anything it is that the left wins nothing if
it limits its objectives. This, however, has not been a widely drawn conclusion.
Typically it has been concluded that not enough concessions were made, rather
than too many. Consequently, next time around the left has been even more
modest in its demands upon capitalist society. Sometimes, as after the Second
World War, this response has reached grotesque proportions, as the Western
left has set about quelling working class militancy in order to prove itself
worthy of official state patronage.
Unfortunately for the left, however, the authorities have proved rather
ungrateful. Socialists have ended up incapable either of articulating the
more radical aspirations which the limitations of capitalist society generate,
or of defending the small concessions which capitalism has sporadically
made. As a consequence the left has become increasingly isolated from any
major current within society.
A symptom of this decline has been an ever-decreasing level of self-belief
and an ever-increasing passivity. As the left lost any sense of its own
capacity to change the world by leading a movement, it put its faith in
forces outside of its control. The attachment to ready-made 'models' increased
in proportion to the left's inability to make one of its own.
For most of this century, the prime 'model' has been the Soviet Union. But
many others followed, as each turned out to be something of a disappointment.
The more marginal radical forces became, the more desperate became the models.
At various times since the Second World War, China, Yugoslavia, Cuba, Sweden
and many others have been promoted as the ideal to emulate. The complete
collapse of the USSR, the model upon which all others were dependent, has
destroyed the basis upon which the modern left was founded.
The left has been on course for a more or less complete accommodation with
the status quo for over half a century. The collapse of Stalinism has accelerated
that process and brought it out in the open. It has led most radicals to
make their final peace with capitalist society.
In some respects the current thinking of the left represents more of the
perennial calls to make further concessions and invent models. But it is
distinct in its open acceptance of the market system. In their enthusiasm
for the market economy, many left-wing converts are less qualified than
the right. Now more isolated from society than even the capitalist elite
itself, they seem insensitive to the absurdity of hailing the market economy
at a time when it is collapsing into slump. Along the way they have also
picked up a lot of the other ideological baggage that has been associated
with postwar advocacy of the market. The concern with the notions of 'individual
citizenship' and 'pluralism', which was promoted by Cold War ideologues
in the 1950s to undermine the left, has now been inherited by the ex-radicals
of the nineties. In so far as they still see it as possible to do anything,
it is to return to the utopian socialism of the early nineteenth century
and dream that one day common sense may prevail.
The left's response to the collapse of Stalinism has been extraordinarily
defensive. Given the political dependence of most left tendencies upon the
old Soviet bloc, they rightly sensed their own demise in the ruins of the
Berlin Wall. Their reflex has been frantically to distance themselves - to
prove that it was really nothing to do with them. To make this quite clear,
they have embarked upon rubbishing not just the Stalinist deformation of
the Russian Revolution, but even the revolution itself.
For those such as Alex Callinicos who still wish to retain an association
with the Marxist tradition, this takes the form of trying to prove that
Lenin was actually a democrat, and that the Bolshevik Party was nothing
more than a group of trade union activists. While conceding in The Revenge
of History that there was a problem with the professional and 'elitist'
form of organisation adopted by the Russian revolutionaries, he assures
us that they had abandoned such nonsense by the time of the revolution.
Although Callinicos' avowed aim is to uphold the revolutionary tradition,
the net effect of all this is to reinforce the defensive outlook of the
left - an outlook typified by ex-Stalinists who have changed their party
names from Communist to Democratic Nicepersons.
Most old radicals go a lot further than Callinicos, and fully concede that
the Bolshevik Revolution was the work of an unrepresentative and bureaucratic
elite. Lenin, with what New Left Review editor Robin Blackburn calls
his 'cult of organisation and discipline' and his 'intolerance and ferocity',
assumes Charles Manson-like proportions as the ring leader of a strange
sect (After the Fall, p189).
Reflecting the fatalism of our times, what the left now really objects to
about the revolution was its 'voluntarism'. The fact that human beings sought
to make their own history, regardless of the difficulties of circumstance
and the 'laws of history', is the real object of attack. This becomes even
clearer in the explicit objection to the idea that society could be planned.
According to much of the left intelligentsia today, the problem was not
the specific form of planning adopted by Stalin - a bureaucratic system devoid
of possibility because of the absence of working class control. Rather,
they say, it is not possible to transcend the market system as a way of
allocating the resources of society, since human beings could never hope
to reproduce the complexity of its operations. Although attributing this
view to the West Indian radical CLR James, Blackburn gives the game away
when he says that planning 'expressed a besotted faith in the powers of
intellect and a necessary totalitarian logic' (ibid, p197). According
to the new left wisdom, to try to defy the laws of the market is like defying
the law of gravity, and has even more catastrophic results.
The capitalist market is in its essentials seen as the only way in which
the economy can be efficiently regulated. Socialists are now said to have
been foolish ever to have argued the need to transcend the economic limitations
imposed by the capitalist laws of production for profit. Radical intellectuals
now suggest that substantive criticism of capitalism can amount to nothing,
as planning could never rival the marvels of competition. Instead, they
conclude, the left should have restricted itself to requesting a more democratic
political system and a degree of economic redistribution.
As the American radical Stephen Bronner puts it, the 'adherence to socialist
values must stem less from any "scientific" conviction...than
from an ethical commitment to their just character'. (Moments of Decision,
p140) Since the market is the best system available, socialism should
be confined to a call for more fairness in its social policy. In 'Out of
the Ashes', his contribution to After the Fall, Eric Hobsbawm puts
the case bluntly: 'The argument that socialism is needed to abolish hunger
and poverty is no longer convincing...the material argument has been weakened.'
(p320) Rather, it appears that 'socialists are there to remind the world
that people and not production come first' (p324).
Anyone vaguely familiar with Marxism will recognise this to be the very
antithesis of its rationale. Marxists have always understood that improving
the efficiency of production is the prerequisite for liberating people.
The scientific character of Marx's case developed through a direct attack
upon the ethical arguments of the early utopian socialists. Rather than
socialism being an ideal waiting to be realised through the power of reason,
Marxism established that socialism would come about as the culmination of
attempts by the working class to remove the restrictions which capitalism
places upon the advancement of human needs. As Blackburn himself is forced
to concede, 'Marx insisted that socialism should arise from the real movement
and not be cooked up by thinkers in their studies' (p180).
However, much of the old left now seems to have conceded that capitalism
has proved capable of satisfying the needs of the working class. As the
world economy enters its worst slump for at least half a century, Hobsbawm
can seriously say that the 'material argument' for socialism 'has been weakened'.
This concession can clearly have nothing to do with any dynamism in the
market system. Instead, it reflects the fact that the collapse of the left's
old models has left it bereft of any alternative to the capitalist economy.
It has therefore set about revising the whole basis for socialism, so that
it has nothing to do with the search for a superior means of satisfying
When the left intellectuals survey the history of the socialist movement,
they see its most fruitful moments as those when it stuck to the realm of
extending democracy rather than expressing any foolish pretensions to tinker
with the economy. The new models for Bronner, for example, are the French
Popular Front government of the 1930s and the Allende regime of the early
1970s in Chile. That both these regimes paved the way to disaster is no
matter. What is important is that they both identi-fied themselves with
parliamentary democracy. Some commentators even have the audacity to suggest
that Marx himself was just a radical democrat, and the subsequent emphasis
upon economic development was merely an unfortunate misinterpretation.
Rewriting the past is all very well. You can turn Marx into a parliamentarian
or even, as Blackburn does, convert Lenin and Trotsky into men who realised
the necessity for the market. The trouble is that, once you abolish any
substantive case for socialism in the here and now, its future can at best
arise from the realm of desire rather than of necessity. Thus in introducing
one of the contributors to his volume, Blackburn tells us that 'Goran Therborn
transports us into an imagined future beyond capitalism' (pxiv).
Beam us up, Goran! Wishful thinking becomes a substitute for serious political
And what is so much better about life in Mr Therborn's Disneyland dream
world? Well, we will care more about the environment and have equalled out
the inequality between the first and third worlds. Ecology and third world
poverty are the only issues remaining for a left incapable of mounting a
substantial critique of Western capitalism. Where the original utopian socialists
dreamed of reason prevailing over inequality and heralding a new economic
order based upon the abolition of competition, their contemporaries only
hope that people will see the sense of respecting the trees and feeding
the poor. Today, it seems, even utopia has become a very modest proposal.
Of course, not all radicals are prepared to abandon any concept of meaningful
change. Traditionalists like Callinicos are rightly scathing of the new
left's love of the market and its abandonment of reality. But they are so
preoccupied with looking to the past for solutions (a problem captured in
the title of Callinicos' The Revenge of History) that they find it
difficult to reply without also adopting a distinctly utopian flavour.
Accepting that the 'case for socialism' rests primarily upon the terrain
of the past means it is difficult to justify its relevance to today. Unless
the need for an alternative system is presented as a response to the problems
of our time, we can only confirm the prejudice that Marxism is a force for
the dead rather than the living. In short, we need a critique of contemporary
capitalism. From this will emerge a Marxism for our own times instead of
one suitable for the situations confronting Lenin, Trotsky or Luxemburg.
The first thing to do is to accept that the collapse of Stalinism means
we do not have to apologise for ourselves. True, our opponents will continue
to suggest that any experiments will lead to catastrophe, and hold up the
Soviet experience as evidence that revolution leads to dictatorship. But
the force of one historical argument can only fade in relation to the pressing
problems facing society in the here and now. There is no more of a relationship
between the Russian Revolution and bureaucratic dictatorship than there
is between crossing the road and getting run over. It may happen, but does
that mean we are to exclude the possibility of reaching the other side?
Is it fate, or is there a possibility that human beings have the capacity
to change their destiny?
We certainly no longer need self-consciously to dwell upon the limitations
of the Soviet experiment to the exclusion of confronting the central problem
of modern capitalism. Such an orientation, as is clear with Callinicos'
work, can at best lead only to an academic and abstract discussion of the
most appropriate forms for the extension of working class democracy, and
confirm the prejudice that Marxism is an outlook rooted in the past rather
than the present.
Today's radical politics bears more resemblance to a religion than a serious
alternative to capitalism. It is appropriate that contributors to these
volumes feel able to quote approvingly the words of priests. Bronner chooses
Martin Luther King to conclude his volume. Eduardo Galeano adds that 'Jesse
Jackson championed the right to dream: "Let us defend that right",
he said....And today more than ever it is necessary to dream.' (After
the Fall, p254). We should remember that it is the slave who is able
only to dream. With no prospect of abolishing servitude it is only possible
to live a life of freedom in the imagination or the afterlife.
Marxism is not a dream or utopia because it is able to identify the potential
for progress in the present, and to isolate the capitalist market as the
obstacle which prevents that potential being realised. On that basis it
is possible to provide a rather more practical and inspiring vision of a
better future than the unappealing world of eco-friendly Guardian readers
which seems to be the limit of the left intelligentsia's exhausted imagination.
Reproduced from Living Marxism issue 48, October 1992