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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

  • Accounting for Growth: Stripping the Camouflage from Company Accounts, Terry Smith, Century Business, £19.99 hbk, £12.99 pbk
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 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 guide'.

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 clients.

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 profession.

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.' (p4)

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:

  • After the Fall: The Failure of Communism and the Future of Socialism, Robin Blackburn (ed), Verso, £29.95 hbk, £10.95 pbk
  • 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
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.

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 material needs.

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 analysis.

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

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