European corporate malfeasance. Ahold out / Europe’s Enron

Date: 01/03/03

The Ahold scandal shows that Europe is not immune from America's corporate ills

AS THE post-Enron wave of corporate scandals washed over America last year, a common response in Europe was: it couldn't happen here. Far from having the world's best-policed markets, the United States, many European politicians claimed, suffered uniquely from a lethal combination of greedy and overpaid bosses, conflicted auditors and investment bankers, reliance on accounting rules not principles, and an obsession with quarterly profit numbers. In America, as many as 1,200 companies have been forced to restate their accounts in the past five years; in Europe the number is barely in double digits. So it is outrageous, many Europeans now argue, that America is seeking to impose the unwieldy Sarbanes-Oxley act, passed in the wake of Enron and WorldCom, on European companies listed in New York.

As more sensible European regulators recognise, this smugness was never justified: it is only necessary to recall scandals such as Vivendi, ABB, Elan and EM.TV. But Europe's claim of immunity from corporate sleaze has now been blown out of the water by this week's revelations that Royal Ahold of the Netherlands, the world's third-biggest food retailer, overstated its profits for 2001-02 by as much as $500m. Its chief executive and chief financial officer have both quit.

It is true that Ahold's accounting deficiencies mainly involved American subsidiaries that it bought in a decade-long acquisition binge, though they also stretched to Argentina and Scandinavia. But the company's Amsterdam-based auditors, Deloitte & Touche, failed to pick the problems up in 2001, even though worries about Ahold's accounts were widely expressed in the markets for most of last year. Ahold's board, far from questioning the chief executive closely, tamely extended his term for up to seven years as recently as last spring. The Dutch market regulator admitted this week that it had no powers of discipline over faulty auditing.

What about the relative numbers of restatements? Because America's GAAP accounting system relies on thousands of pages of rules, it is more vulnerable to manipulation than Europe's more principles-based approach. Wall Street's excesses of the 1990s were also more egregious than Europe's. But given the largely non-existent regulation of auditors and the poor corporate governance prevalent in much of Europe, a more plausible conclusion is that Europe has had fewer accounting scandals than America mainly because nobody has seriously looked for them, not because they are not there.

This is not to say that Europe should adopt Sarbanes-Oxley in toto. That hastily drafted law was designed for America's very different system; it precludes the two-tier boards that are common in Europe, for example. Many of the law's rules on managers and boards seem unduly intrusive even for America. But statutory, independent regulation of auditors, as prescribed by Sarbanes-Oxley, makes sense everywhere. So do rules to stop accounting firms doing consulting work for audit clients; and it is also worth considering mandatory rotation of auditors (Deloitte had audited Ahold for 15 years).

The case for independent regulation is the stronger because European Union companies are due to adopt international accounting standards by 2005. It is little use taking this welcome step towards tougher standards, which the Europeans are urging on America in the interests of global harmonisation, if there is nobody to oversee the rules. Yet the European Federation of Accountants admits that, in six EU countries, there is in effect no enforcement at all.

Bad apples and oranges

After Enron and WorldCom were followed by the bankruptcy and criminal conviction of Andersen, which had audited both companies, the remaining Big Four hinted that Andersen had been an exceptional case: a rotten apple amid a barrel of good ones. Andersen does seem to have been peculiarly culpable. Yet most of the other firms have now also been tarnished by scandal in the past year or so: KPMG over Xerox, PricewaterhouseCoopers over Tyco, Deloitte over Adelphia, for example. This litany means that statutory regulation of auditors is now essential if investors are to regain their shattered confidence in the financial markets.

It is, in any event, pointless for politicians to crow about the merits of their respective systems. As companies such as Ahold go global, they run into countless national regulators and supervisors - and it is the weakest link that is always most likely to prove their (and their investors') undoing. The right response is to adopt the strongest, not the laxest, regimes possible. And that means both enforcement of international accounting standards and tough regulation of auditors.

The Ahold scandal shows that Europe is not immune from America's corporate ills.

• Primary Source