From: Noel Hodson [noelhodson@btconnect.com]
Sent: 03 July 2002 13:55
To: wjoice@erols.com; william.michael@gsa.gov;
tkistner@nww.com; stierney@valleymetro.org; RLSmithNet@aol.com; Rebecca.siman@verizon.com;
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Cc: Evan Davis - BBC; Christine Lester WMTL;
Andrew Smith; Gil@Gilgordon. Com
Subject: After ENRON - The Future of Auditors & Pensions
- in the Information Society.
SW2000
TELEWORK
STUDIES
TELEWORK,
TRANSPORT,
ENVIRONMENT,
ECONOMICS
Back to noelhodson.com & SW2000 Telework
Studies front page
3rd July 2002.
Recent
financial scandals and market fluctuations will, I believe, have far reaching
consequences that ITAC members may like to factor into their planning.
1) The
populace will learn to count, with consequences for government.
2) The Big
Four auditors will break up.
3) Pension
Fund Managers will have to fight for their lives.
4) Telework makes
it different - Financial Modellers had better get it right.
5) The race
for unearned income. Invest in reality. The corporates
are not dead yet.
Gil - on your return from
Thanks for your notes about my forecasts. In essence I believe as
do several famous commentators that the ENRON etc Bubble may prove to be a
greater force for change than the 911 disaster. Telework and the Information
Society have a role and an influence that has never existed before, for example
with the sale in April 02 of the one-billionth personal computer and with up to
28 million USA telework home-offices and mobile-offices established. A large
percentage of these have programmes like EXCEL that enable unprecedented
arithmetic calculation.
To date the majority has been innumerate concerning "Big
Business" and "Government Financing" and have trusted the
professionals (The City/Wall Street) who purport to understand and are able to
read the runes. This latter elite have shown themselves to have feet of clay
and, comparable to the social transformation at the time of translating the Bible into English
and enabling the populace to read it for themselves and to think for
themselves, rather than accept the authority of The Church, ordinary people, thanks
to computers, will now learn how to (ac)count. This ability to comprehend
financial matters, previously the exclusive, hermetic preserve of a tiny, priest-caste elite will transform society. And it
has already started.
The immediate problem in this the wealthiest of any society in
history, is that computers enable ever more automation, daily reducing
necessity work - and taking jobs out of the market. EG, the Oxford (UK) car
factory employed about 12,000 men 15 years ago. It now employs less than 2,000
and makes as many cars; but rewards for "necessary" work remains the
largest and most accepted means of distributing wealth. Wealth is more and more
generated by machines, not by people. The rapid disappearance of the historic
mechanism for sharing wealth - paid necessity work - is the cause of the
underlying panic behind the anxious search for early retirement and unearned
income (pensions) that afflicts most OECD countries and underlies the
insatiable greed displayed at ENRON and in many board-rooms. All unearned
income (investments, rents, dividends etc) are (A) governed by the (necessarily
decreasing) Bank Base Rate and (B) are pyramid selling systems where the older
generation (expanding population) rely on the efforts of the younger generation
(now a reducing population) to maintain them.
Today there is too much capital chasing too little unearned income
and this will get worse as my (our) generation, the War Bulge, dump ourselves
onto the retirement market - to be retired for 30 years or more. Governments'
problem is not that we don't have the wealth - automation has given us that -
but that the (work-ethic) mechanisms to share it out are no longer appropriate.
The circumstances have changed but nobody knows how to change the rules of the
game. And Economics has never been a science - but an occult art.
The panic engendered by the frantic thought that we might starve to
death, in our old age, in a land of unprecedented vast wealth and plenitude, is
what drives the guy with $10m to "need" another $100M - enough is
never enough. And hence to ENRON and the other corporate fraud/theft cases that
sabotage society's sanity.
Government must stop the panic. Education and truly scientific and
fair economics, without the crazy distortions of the dogma of political parties
(tribes of mutual help-ourselves-supporters), are the ways forward. But we are
unlikely to get to the new wealth distribution methods for an automated society
without first suffering systemic collapse and frightening dislocations.
So keep stealing and storing the cookies. I'm going back to
procreation to make 10 strong sons and daughters to support me in my old age.
All I need is a willing fertile partner.
I'm a short term pessimist and a long term optimist.
Noel
PS - and remember to move to higher ground.
1) The populace will learn to count, with consequences for
government.
There is
nothing new about "Bubbles" and the financial world survives them
bursting. What is new is the power of computing at everyone's fingertips and
the speed and availability of information. In 1969 at Pergammon
Press in Oxford, the novel, punch card fed computers that recorded the business
(the global sales of exclusive academic papers) occupied 1,000 cubic feet and
had the power of today's pocket calculators. A financial reporting scandal at
that company, the Leasco affair, occupied some 50
external auditors from three firms for six months. Access to the computing room
was highly restricted. The chances of any non-professional grappling with the
numbers or the flow of transactions were zero. The outside world had to trust
the auditors.
In the UK more
than 90% of the population is innumerate; psychological tests show that our
eyes glaze over, as if asleep, when confronted with a page of numbers. However
the majority become super alert if their own pocket money is involved and show
amazing abilities in calculating, with mental-arithmetic, shopping discounts
and betting odds and returns. What we haven't been able to do is to calculate
beyond a certain level of complexity or into the future; thus losing the
ability to check the costs of loans and returns on long term transactions,
savings and investments; relying instead on the honesty of government and The
City/Wall Street. With two-thirds of the
USA and about one-third of the UK being shareholders and being daily reminded
that our pensions are dependent on the Stock Markets; and furnished with PC's
and EXCEL and investment calculators on the WWW, the average citizen will
rapidly learn to account.
This will be as
profound a change as was the majority learning to read. It will be a
transformational power in society. Governments, banks and all financial
officers have only a little time to sweep their stables clean before the
general populace spots the errors and scams - and loses all faith in, and stops
investing in, leaders.
2) The Big Four auditors will break up.
In the UK there
are some 250,000 registered auditors, implying 3M in the OECD countries. Post
Arthur Andersen, the remaining Big Four accountants globally employ about
475,000 or 16% of the total. The flawed Arthur Andersen auditor-and-advisor
culture infects all the large firms. Even in the sober and less adventurous UK,
accounting standards have been formally adopted that artificially boost
reported profits and baffle financial analysts. For example, under FRS15,
mortgage interest paid on commercial properties can quite legally be accounted
for as "capital" and added to the value of the Balance Sheet instead
of being a reduction of profits. For a
property based supermarket chain or hotel group, FRS15 adds millions to the
bottom line. Such manipulations, that
defy common-sense, whether legal or illegal, are, more often than not,
recommended by the business consultancy arms of the major auditors who also
supply most of the Finance Directors to quoted companies, who take the same
distorted habits with them.
It is
imperative that the Stock Exchange authorities clean up the reports on all
quoted companies. This will inevitably mean huge adjustments in most reports to
remove the distortions. Acceptable world standards will have to be forged (no
pun intended) and applied. Arthur Andersen have lost
their moral authority and their business. The partners are likely to be sued
for everything they have by small and large shareholders and by employees. The
other Big Four will swiftly follow. This
collapse will be rapid, as it too important to leave to chance and to
"laissez faire".
From the
remaining 2,520,000 registered OECD auditors, tough specialist audit firms will
spring up to become trusted by the Stock Exchange managers, financial
journalists and, most important of all, by individual investors. A key factor in these trends is the response of
the insurers when/if the Big Four are pursued for
professional negligence on an unprecedented scale.
3) Pension Fund Managers will have to
fight for their lives.
Where? the question will slowly dawn on the emerging accounting and
arithmetically empowered consciousness of the ordinary citizen’s mind, were the
powerful, skilled and hugely well paid
Not only have specific
shareholders and tens of thousands of employees been cheated but hundreds of
millions of pension investors, having saved for up to 40 years, are currently
being braced to anticipate crushingly low returns when they retire. In the UK, our first house in 1970 cost us
£16,000; today 30 years later, that house is worth £500,000 or 31 times its
cost. Pick any blue-chip share, like IBM, or wages or market index and the same
sort of multiple is seen. Except in the institutions where workers have invested
their pensions. Having sold the, often
inescapable, pension "contracts" the pension fund managers, having
lived extremely well themselves and no doubt having secured very large personal
pensions, are now mumbling about the
difficulty of securing a 2% to 3% return, or, when compounded and compared to
the house, just 2.6 times over 40 years. Credit card loans charge 20%-30% per
annum interest. What have these experts been investing in?
All Financial
Services Products will be examined using common-sense criteria and the sellers
will lose their credibility as the arithmetically enabled population figure out
the sums. Then we will ask where the money has gone. This will lead to a rapid
decline in the incomes of brokers and of all financial services providers.
Governments will introduce reliable investment and savings vehicles where the
transactions, investments and running costs are entirely transparent and
accessible to investors on their home computers.
4) Telework makes it different - Financial
Modellers had better get it right.
The Information
Society and the population's ability to access and process data and to
communicate findings, makes this scandal different from all the ones that have
preceded it. Up to the advent of the personal computer a tiny fraction of
society could address major financial and economic matters. They were the
privileged minority who could count and most have looked after number-one first
and society second. As recently as 1992,
in Thatcher's Shareholders' Democracy, the millions of small shareholders who
had bought via the Internet, were locked out of
transactions when share prices collapsed; while the big players could get out.
Handling money, other than weekly cash wages, has been a very restricted
practice. Income has been more secretive than incest. After ENRON that level of
secrecy is already changing and, just as youngsters astonish their elders with
their computer skills, so will they astonish professional financial analysts
whose errors will be spotted by small investors checking their finances.
5) The race for unearned income. Invest in reality. The corporates are not dead yet.
Most of the
world's valuable assets are owned by major companies. Governments own diverse
public monopolies, chief among them being their right to collect taxes and to
hold public land. Safe Government Bonds do not greatly increase in value but do
pay interest.
As OECD
countries change their breeding habits, for example the UK and Italy are now
below replacement levels at 1.6 children per family, and as we all are
increasingly reluctant to die on time; and as technology automatically creates
ever greater amounts of real wealth (houses, tables, food, cars, clothes, TV's
etc) with fewer jobs, an ageing population, sold on and fixed on the idea of early
retirement, is applying its capital to acquire unearned income. The basic
economic problem is too much capital chasing too little unearned income to
support as much as 30 years of retirement in an ever shrinking job market. All
unearned income is governed by the Bank Base Rate - still high in the UK
compared to the USA, Europe and Japan (buy sterling to get the highest interest
in a safe currency).
The Information
Society makes the problem more acute. The minute one of us would-be-capitalists
finds a good investment, the whole world wants to join in, swamps the source of
our retirement income and wrecks our hopes.
As investors are frightened away from the Stock
Markets by bent accountants supporting insatiably greedy managers, share prices
falter and fall, making the dividends a better return, attracting buyers.
Those who quit the stock markets may buy houses to rent out. This has been
particularly encouraged in the UK to provide more rented accommodation but
currently it is overcooked, with more houses for rent than (good) tenants, so
rental incomes are falling.
In the medium
and long term the best bet is to invest, for the long term, into the shares of
stable, working corporations. These, properly managed and accurately reporting
results, will yield a sensible dividend and steady growth in the share price
(look back over the past 25 years).
Apart from owning your own business - and probably running it until you
drop - investing in the major companies is the safest way to proceed. Most have
secure Balance Sheets of real, fixed assets that increase in value. Make sure
they do not have lurking Class-Action problems (tobacco, Bophal
etc) that will bankrupt them. Borrowing to make an investment and a quick buck
is however perilous and like all betting is doomed to fail. Property is a safe
option, but needs intensive management (hard work) and can be subject to long
capital value cycles.
Oct 01 - USA Stats from ITAC show 28.8M USA teleworkers, 20% of
the workforce. The WSJ (Apr 02) report 25.2M & that 30% of
100+ organisations telework. DataMonitor
reports 16%(4m)in the
Noel Hodson, Director
SW2000 Telework Studies
CEO, Experts Unlimited
Director, The International Telework
Association and Council (ITAC)
14 Brookside OXFORD OX3 7PK, UK
Tel +44(0)1865 760994 fax 764520
noelhodson@btconnect.com
www.noelhodson.com