FlyTitle: Corporate fraud
The crisis will expose a decade’s worth of swindling and aggressive accounting
WHEN BERNIE MADOFF owned up to a $65bn Ponzi scheme in December 2008, it was not out of guilt. He knew the game was up. Three months earlier Lehman Brothers had imploded. The market meltdown sent clients clamouring to withdraw from his funds, leaving them depleted with many investors still unpaid. American regulators had not spotted the fraud, despite a tip-off years earlier. It was not them that did for Mr Madoff, but recession.
Booms help fraudsters paper over cracks in their accounts, from fictitious investment returns to exaggerated sales. Slowdowns rip the covering off. As Baruch Lev, an accounting professor at New York University, puts it, “In good times everyone looks good, and the market punishes you harshly for not keeping up.” Many big book-cooking scandals of the past 20 years emerged in downturns. A decade before the crisis of 2007-09 the dotcom crash exposed accounting sins at Enron and WorldCom perpetrated in the go-go late 1990s. Both firms went bust soon after. As Warren Buffett, a revered investor, once put it: “You only find out who is swimming naked when the tide goes out.” This time, thanks to a pandemic, the water has whooshed away at record speed.
Hell and low water
Much of the swimwear was already threadbare: a borrowing binge has strained many corporate balance-sheets. Some dirty secrets are beginning to come out. Take Luckin Coffee, which had expanded to take on Starbucks in China, attracting big-name investors like BlackRock and Singapore’s sovereign-wealth fund. On April 2nd the Nasdaq-listed Chinese chain announced an ongoing internal probe amid allegations that its chief operating officer and other employees may have fabricated over 2bn yuan ($280m) in sales. On April 14th Citron Research, a short-seller, accused GSX, a Chinese online-tutoring firm listed in New York, of inflating last year’s sales. In a statement GSX denied the allegations and said Citron’s report was misleading and “full of subjective maliciousness”.
These revelations have revived fears over the flaky corporate governance of Chinese firms listed on foreign exchanges, whose audits, conducted at home, China’s government makes it hard for outsiders to inspect. A gaggle of fraud-hunters like Citron and Muddy Waters, which outed Luckin, claimed numerous scalps after the first wave of such listings a decade ago. This time they are looking beyond China.
Blue Orca Capital, an Asia-focused fund targeting corporate “zeros”, expects opportunities to pop up in other emerging markets, Europe and America. “My entire career has been in a bull market,” says its founder, Soren Aandahl. “This is exciting.” Mr Aandahl is eyeing any firms with discrepancies between the amount of capital they need to raise and the cash their accounts say they are generating. Others are focusing on industries hit hardest by the pandemic, such as travel, entertainment and property.
杀人鲸资本（Blue Orca Capital）是一家专注于亚洲的基金，主要针对企业的“零息债券”。它预期机会将在其他新兴市场、欧洲和美国出现。“我的整个职业生涯都处于牛市，”创始人索伦·安达尔（Soren Aandahl）说，“眼下真令人兴奋。”现在，只要哪家公司需要募集的资金与它账目显示的收入之间有出入，那它就是安达尔的目标。其他打假公司则把重点放在受这场大流行病打击最为严重的行业，比如旅游、娱乐和房地产等。
Only a small minority of firms resort to outright fraud. Far more prettify profit-and-loss statements with accounting wheezes that fall in a grey area. This accounts for much of what John Kenneth Galbraith, an economist, called “the bezzle” and “psychic wealth”: gains that appear real but prove illusory.
明目张胆造假的公司只是少数。绝大多数公司是用一些属于灰色地带的会计把戏来美化自己的损益表。这种做法基本上就是经济学家约翰·肯尼斯·加尔布雷斯（John Kenneth Galbraith）所说的“占款”（the bezzle）和“心理财富”：看似真实、实则虚幻的收益。
In the bull market startups became masters of conjuring up novel metrics that flatter performance. WeWork’s “community-adjusted” earnings before interest, taxes, depreciation and amortisation (EBITDA) transformed a hefty loss for 2018 under Generally Accepted Accounting Principles (GAAP) into a profit. Illegal? No. A red flag? Absolutely. Many investors turned a blind eye because they bought into what Mr Aandahl calls “the myth in the shareholder list”: all would be well if other high-profile backers were on board (as with Luckin).
Non-GAAP adjustments have spread like wildfire through corporate accounts, making it harder to discern what numbers reflect a firm’s true financial position. The average number of non-GAAP measures used in filings by companies in the S&P 500 index has increased from 2.5 to 7.5 in the past 20 years, according to PwC, a consultancy. In credit agreements analysed by Zion Research Group, the definition of EBITDA ranges from 75 words to over 2,200. GAAP is far from perfect, but some of the divergence from it has clearly been designed to pull wool over investors’ eyes. One study found that non-GAAP profits were, on average, 15% higher than GAAP profits.
非GAAP调整已经如野火般在公司账目中蔓延，这让人们更加难以辨别哪些数字反映了公司真实的财务状况。咨询公司普华永道的数据显示，在过去20年里，标准普尔500指数公司在财报中使用的非GAAP指标的平均数已经从2.5增加到了7.5。在Zion Research Group分析的信贷协定中，EBITDA的释义从75个词到2200多个词不等。GAAP还远不够完美，但与之相左的一些做法显然是用来蒙蔽投资者的。一项研究发现，非GAAP方法下的利润比GAAP平均高出15%。
Playing around with earnings and revenue-recognition metrics is this generation’s equivalent of dotcoms using bots and other tricks to boost “eyeballs” 20 years ago, says Jules Kroll of K2 Intelligence, the doyen of corporate sleuths. “When an area is hot to the point of overheated, there is a growing temptation to juice the numbers.” In an ominous sign, SoftBank, a Japanese technology conglomerate which bet big on WeWork and dozens of other startups, said last month that it expects an operating loss of ¥1.4trn ($12.5bn) in its last fiscal year.
企业侦探界的鼻祖K2 Intelligence的朱尔斯·克罗尔（Jules Kroll）表示，20年前互联网公司利用自动程序和其他花招来赚“眼球”，而现在这一代人则在收益和收入确认指标上动手脚。“当一个地区的经济增长过热时，给数据注水的诱惑力就会增大。”上个月，在WeWork和其他几十家创业公司押下重注的日本科技集团软银表示，预计上一财年的营运亏损将达到1.4万亿日元（125亿美元），这是个不祥之兆。
Besides exposing old schemes, the pandemic is likely to give rise to new ones. When economic survival is threatened, the line separating what is acceptable and unacceptable when booking revenues or making market disclosures can be blurred. Mr Kroll reckons that “amid such massive dislocation, some will inevitably cheat.”
Bruce Dorris, head of the Association of Certified Fraud Examiners, the world’s largest anti-fraud outfit, says the effects of covid-19 look like “a perfect storm for fraud”. It may engender everything from iffy accounting to stimulus-linked scams as thousands of firms—including bogus applicants—hustle for help. One fraud investigator points to private-equity-owned firms as potential targets. “There are lots of them, they are highly leveraged and they may not qualify for bail-outs because they have deep-pocketed sponsors,” he says. That increases the temptation to resort to unseemly practices. The ebbing tide is likely to reveal plenty of corporate nudity. That will not stop some businesses from taking up naturism.■
全球最大的反欺诈机构美国注册舞弊检查师协会（Association of Certified Fraud Examiners）的负责人布鲁斯·多里斯（Bruce Dorris）表示，新冠肺炎的影响看上去像“一场欺诈的完美风暴”。当成千上万的公司——其中不乏假冒的申请者——争相申请援助时，可能会引发从可疑账目到与经济刺激政策相关的造假等各种各样的问题。一位反造假调查人员指出，私募股权持有的公司是潜在的调查对象。“它们数量众多，杠杆率高，而且因为有财大气粗的投资者，可能不符合救济条件。”他表示。这更会诱使它们去走歪门邪道。潮水逐渐退去，很多裸泳的企业很可能会原形毕露。但这并不会阻止一些企业加入裸泳大军。