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Monday, 20 April 2009

Accounting for Growth

Terry Smith, last heard of running Collins Stewart, published a book in 1992 that caused up an uproar in the City and beyond, and as a result he lost his job at UBS. The 12 techniques identified by Smith weee all perfectly legal but misled investors. All of the described practices tended to do one of 2 things: increase reported profits or make a company's balance sheet look stronger. The book caused a stir not just because it explained the accounting tricks then employed quite legally, but it also listed the practices undertaken by various large UK companies.

What made it all hang together was the fact that several companies such as British & Commonwealth, Polly Peck, Brent Walker and Coloroll suddenly collapsed having apparently prospered in previous years. In all these cases, an apparently whizzy business was growing solidly and reporting healthy profits although doubts surrounded the presentation of their financial position and the availability of finance. Eventually as confidence wanes, the bubble burst and the accounting tricks required no longer worked and the finance dried up.

Inevitably this was followed by the presentation a disastrous set of accounts and the collapse of the company.

It would be interesting to hear Mr Smith's reaction to the Chancellor's budget statement on Wednesday.

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