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The Back Story

By Mel Duvall  |  Posted 2003-08-01 Print this article Print

Shareholders nearly deify Warren Buffett for the way he manages his diverse holding company, Berkshire Hathaway of Omaha.

The Back Story

All that does not seem to matter to shareholders who have profited greatly from Berkshire. From January 1990 to the middle of July, Berkshire's stock price grew 757%, from $8,625 to $73,900.

Indeed, while other investors have called for the heads of WorldCom executives, sued HealthSouth for stock fraud and ripped down the name of disgraced Enron from Houston's ballpark, shareholders at the Buffett event were happily buying all sorts of memorabilia with the Berkshire logo—charm bracelets, windbreakers and glass globes.

They came to hear what was wrong with corporate America, and Buffett and longtime friend and business partner Charles Munger rose to the occasion. Munger, known for using the odd expletive, saved his strongest criticisms for the accountants who failed to catch (or sometimes even participated in) financial dirty tricks. "The faithlessness of that profession over the last 20 years has been unpleasant to watch," Munger said.

The prevalence of fraudulent financial reporting is hard to gauge. Accounting firm PricewaterhouseCoopers this year tried to survey several hundred of the largest U.S. companies about financial abuse. Only 91 responded. Of those, slightly more than a third said they had been victims of an economic crime in the past two years with most citing embezzlement or theft. Only two said they were affected by falsified financial statements.

On the same day the PricewaterhouseCoopers report was released, though, far more than two companies were openly fighting financial fraud. On that day in the first week of July, the new auditor of medical giant HealthSouth—none other than PricewaterhouseCoopers—said it found more evidence of potential financial fraud, bringing the damage possibly above $3 billion. Simultaneously, Jerome Schwartz and Leonard Goldner, the chairman and general counsel, respectively, of Symbol Technologies, were forced to resign. The handheld-computer maker is being investigated for accounting fraud. Separately, a federal judge approved a payment of $750 million by telecommunications firm WorldCom to settle an accounting fraud lawsuit brought by the Securities and Exchange Commission.

In Europe, food conglomerate Royal Ahold said its headquarters in the Netherlands and the offices of its accountant, Deloitte & Touche, were raided over the July 4 weekend for evidence of possible irregularities in the way it booked sales at some joint ventures. That follows an alleged $1.1 billion accounting scandal involving its U.S. Foodservice subsidiary. And Paul Allaire, former Xerox chief executive, was barred from serving as a director of a public corporation for five years and agreed to pay a $1 million penalty, among other punitive measures, for overstating profits by $1.4 billion during his watch.

Owners of American companies have been pummeled as a result of the accounting scandals that started with Enron and reached the decadent zenith of Tyco International, amid the worst recession since World War II. The Dow Jones Industrial Average lost 39% of its value in less than three years, falling from 11,750 in January 2000 to 7,197 in October 2002. The value of the technology-stock-heavy Nasdaq market plummeted 78%.

Contributing Editor
Mel Duvall is a veteran business and technology journalist, having written for a variety of daily newspapers and magazines for 17 years. Most recently he was the Business Commerce Editor for Interactive Week, and previously served as a senior business writer for The Financial Post.

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