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Accounting woes may cross the pond
Commentary: The case for keeping dollars in the U.S.
By Mike Tarsala, CBS.MarketWatch.com 5/29/2002


SAN FRANCISCO (CBS.MW) -- The inevitable spread of financial accounting scandals overseas has the potential to make seemingly fertile tech investment opportunities in Europe and Asia smell like fertilizer.

Foreign tech investing is fast becoming the new trend, as shareholders look for an alternative to poor-performing tech stocks in the United States. Many believe that stocks outside the U.S. have been overlooked for too long, and many are now a bargain -- especially on a price-to-earnings basis.

Recent currency fluctuations have only fueled buzz about foreign-based tech. After a six-year climb, the value of the dollar is falling in relation to most foreign denominations. Investors are pulling money out of U.S. markets and putting it to work elsewhere.

And yet, for all the reasons to invest overseas, there's still one big argument for keeping dollars in the U.S. of A.: Some analysts fear that the Enron-inspired accounting witch hunt that crippled many Yankee tech issues is about to be make its way across the oceans.

"The more companies that are charged with deceptive accounting here in the U.S., the more likely something will happen internationally," said Tony Loviscek, a professor of finance at Seton Hall University in South Orange, N.J. "How could it not? I would be surprised if we didn't hear about something before the end of the year."

The idea that Enron-style shenanigans don't happen overseas is no less na´ve than thinking the scandal surrounding Catholic priests is confined to the U.S., Loviscek says.

For many investors in Europe and Asia, delving into financial reports wrought with half-truths is nothing new. Back in 1998, the Asian financial crisis hit stocks and currencies hard, as banks, developers and company executives hid the region's true financial problems from the world.

At various times over the past 10 years, Europe has seen corporate accounting blow-ups when funny-money deals were struck to preserve jobs, rather than shareholder interests, in companies where governments held major investments.

Just because it has happened before in Europe and Asia doesn't mean it can't happen again. There's still reason to believe new accounting tricks will be revealed, as the spotlight on financial reporting broadens in wake of Enron and the collapse of the dot-com economy.

Perverse incentives to lie about financial numbers were not uncommon in many parts of the world during the technology boom. There was intense pressure to meet unrealistically high earnings and sales goals -- especially for divisions with trendy products. Companies became deft at using pro forma numbers to hide expenses and otherwise doctor up financial results.

There may never be another financial shell game that matches the magnitude of Enron (ENRNQ: news, chart, profile), says Michael Lee, vice president of global research for Independence Investments LLC in Boston. But he says many smaller-scale accounting time bombs are still ticking in the global tech industry.

"I would be surprised if there wasn't another situation overseas of some sort," Lee said. "Whether it's false trades, booking revenue ahead of time ... there are various ways to play with the numbers."

In the United States, investors found out about the accounting debacle because the markets soured. Overseas, it may come to light because critics are sour on the markets and they want to tear them down.

In Europe, it would fit the agenda of the political left, which is itching to uncover corporate accounting infractions, so it can argue that free-market policies only benefit the rich, says Jon Low, a senior fellow at Cap Gemini Ernst & Young.

"They can only be greeting the U.S. accounting scandals with glee," he said.

Worldwide, stock markets remain skittish. Additional accounting improprieties that are uncovered could hit shareholders hard.

In the decades following the Great Depression, investors around the globe came to regard the Securities and Exchange Commission as the world's leading safeguard against market abuses.

If Enron and Andersen could happen on the SEC's watch, what makes anyone think it isn't happening right now on a bourse near you?

Mike Tarsala is a San Francisco-based reporter for CBS.MarketWatch.com.


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