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GETTING FLEECED:
"AGGRESSIVE ACCOUNTING" EMPTIES POCKETS, DELAYS RETIREMENTS
by Jason Sanford
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| Shih-Pau Yen, the University's deputy chief information officer, is finding retirement elusive after his investments tanked in the Wall Street tumble. photo: Tom Foley |
For the past year, Shih-Pau Yen has counted the days until his planned September retirement. Every afternoon, he crossed another square off his desk calendar with a large yellow highlighter. When he talked to colleagues in the halls or at meetings, he always told them exactly how long he had until retirement.
For Yen, investing for his retirement was supposed to be simple. As the University’s deputy chief information officer for the Office of Information Technology, he sees technology as essential to America’s future. “I’m a tech person,” he says. “Everyday I’m promoting the future and computers, so of course I invested in technology.”
Now, though, the 35-year University veteran admits some embarrassment at making a public display about his retirement. Thanks to the rupture of the stock market bubble and, more painfully, the business and accounting scandals, Yen’s investments have lost so much money that he is postponing retirement.
“Last year I still had hope that things would turn around,” Yen says. “Now I’m definitely not going to retire in September.”
Like so many people nearing retirement, Yen’s plans have been devastated by the market drop. But while the stock bubble can be understood as a natural part of the market cycle, the scandals have left many investors like Yen wondering if the investment game was rigged from the start.
History of the scandals
Enron. WorldCom. Tyco. Qwest.
According to Norman Bowie, the holder of the Elmer Andersen Chair in Corporate Responsibility at the University’s Carlson School of Management, there hasn’t been a cycle of business scandals like this since the 1930s. “The stock market boom of the ‘90s is partly responsible,” he says. “When everyone is making money, people have a hear-no-evil, see-no-evil approach to corporate wrongdoing. It’s only after people lose money that they get morally outraged.”
In Bowie’s opinion, many of the scandals result from American corporations going through a period of aggressive accounting—a practice, one columnist wrote, that “we used to call fraud.” To inflate their stock market value, companies overstated profits, hid their losses, and used different accounting gimmicks to make their balance sheets look better than they really were. For example, WorldCom moved operating expenses to capital accounts, which is the equivalent of a restaurant saying that purchasing hamburger is the same type of long-term investment as buying a refrigerator.
“Even the good companies that won ethics awards, like Xerox, pursued aggressive accounting,” Bowie says.
And while Americans have traditionally been irritated by business scandals, this time they are especially outraged because they have been hit hard in their retirement pocketbook. In the late 1980s, Americans began to rely less on traditional pension plans for retirement and more on stock-heavy 401(k)s and other tax-deferred programs. With some studies showing up to 50 percent of American households invested in the stock market, this is the first time that business
scandals have had such an impact on so many people’s retirement investments.
“I’ve never seen anything like this in my lifetime,” says Kjell Knudsen, dean of the School of Business and Economics at the University of Minnesota, Duluth. “The drop in the markets, coupled with the ongoing scandals, have led
to a crisis in credibility. Among investors, the trust just isn’t there.”
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| $7 Trillion Lost: The performance of the Wilshire Total Market Index since the high profit of the market in March, 2000. The index is considered by many experts to be the best overall measure of the U.S. stock market's performance. |
Which is exactly how Shih-Pau Yen now views the stock market. “Only a few people know the truth about a company,” he says. “And we who don’t know, will always miss the boat.”
What happens now?
While many economists and market experts are optimistic about the fundamentals of the American economy, they generally agree that this cycle of scandals will have to work itself out. And the first step toward fixing what is wrong, Knudsen says, will be for the government and markets to institute serious reforms, such as greater transparency in company financial statements.
But having new laws passed by Congress is only the start. Knudsen says that equally important to restoring investor confidence will be how the new accounting rules and regulations are interpreted and enforced by organizations like the Securities and Exchange Commission. In addition, adds Knudsen, “There has to be some real consequence [to the people and companies involved in these scandals]. If they simply get a slap on the hand, then I don’t know when we will get out of all of this.”
Unfortunately, a slap on the hand is what usually happens to company executives. “The truth is that it’s hard to convict CEOs of fraud,” Bowie says. With the large amount of money and influential contacts that corporate executives have, he adds, executives are able to mount extremely effective defenses. In addition, trials about accounting fraud and corporate wrongdoing frequently descend into arcane and hard-to-understand gray areas of the law, which means juries sometimes have difficulty determining guilt beyond a reasonable doubt.
“I think we’re still a year out [from the end of these scandals],” Bowie says. “But after that, I suspect we’re going to be in a cycle where people and corporations behave more responsibly.”
Retirement dreams deferred
To Shih-Pau Yen, though, responsibility is easy to assign—the people in charge of Enron, WorldCom, and other disgraced companies knew exactly what they were doing. “They fooled us into thinking they were growing apples for us, using our money as fertilizer,” says Yen. “But in the end all we were left with was weeds.”
Yen also notes the executives of those scandal-plagued companies are still rich. “And the investors?” he asks. “Once our money was the fertilizer, now we’re the fertilizer.”
Yen says that instead of retiring this year he will work for a while longer. In fact, he is happy to have that option. If he faced a mandatory retirement date, like many people in the workforce do, he doesn’t know what he would do.
Still, Yen is hopeful that given time, his investments will turn around. “Hope is the essential human condition. No matter how sick you are, you still hope for recovery. Me? I’m still full of hope.”
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