GLOBAL - Barclays Global Investors (BGI) analyst Noel Mills has warned that the legacy of Enron's collapse could put a halt on prospects of the world economy recovering quickly.
Mills claims that even if the current concerns over US accounting standards are over-exaggerated, the short term damage done by the Enron saga to the US and world economy has already been done. He claims that tougher post-Enron accounting standards may prolong the malaise in the world economy.
The BGI asset allocation strategist believes that the tougher accounting standards will make it harder for firms to find cash for investment spending. Business investment has been severely curtailed during the past 12 months, and he thinks that this combined with massive de-stocking, is the driving force behind the US and world recession. Reduced investment and the continued rundown in inventories stripped 4.5% from economic growth in the fourth quarter.
Mills claims that investors looking for economic recovery are going to be disappointed, as much of that recovery - and the expected accompanying improvement in earnings - is already priced into the market. A tougher accounting regime will mean that the high profits expectations currently embedded in share prices will be that much harder to achieve, prolong the market downturn.
Mills says that while Enron is not the only practitioner of “creative accounting,” it is the most “egregious case”. If creative accounting can elevate a firm to the ranks of the largest companies in the US, what about other sectors of the market, he asks.
The fallout of Enron and the aftermath of the dot com years, could seriously damage investor confidence Mills claims, which will “hang like a millstone” on economic recovery.
Using the dire Japanese economic situation as an example, Mills said that the situation had been exacerbated by the repeated failure of the banks to provide complete disclosure of the bad debts. While “accounting sleight-of-hand” can help paint a positive picture, the “unpleasant reality is that it makes things worse” he said.
By Geoffrey Ho
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