Accounting fallout clouds Europe, too

Companies in Europe are lining up to deny they have Enronitis, and government officials have used allegations of accounting trickery to press for changes in how companies report their financial status.

As information about Global Crossing Holding Ltd.’s finances spill from its databases through government investigations and bankruptcy filings, for example, investors have started peering closely into the books of anyone the company swapped telecommunication capacity with. From Global Crossing, inquiries have sprung up into Qwest Communications International Inc., then Qwest’s partners in Europe.

In a swap, one carrier buys fibre-optic capacity from another company, to whom it then sells approximately equal capacity. What raises questions on the part of investment analysts, however, is when the companies report the sales as revenue and the purchases as a capital expenditure and not an operating cost.

In response to media inquiries, telecommunication firms including U.K.-based Cable and Wireless PLC and pan-European provider KPNQwest NV have issued blunt denials that there was anything improper in the way they booked sales of fiber-optic network capacity.

However, such inquiries indicate that the collapse of Enron Corp. and the resulting scrutiny that all major suppliers have come under has a worldwide impact.

“Enron has confirmed that accountants who conduct audits should not be working alongside colleagues who are doing advisory work for the same firm,” Bert Westendorp, managing partner of Dutch-Belgian law firm Loyens & Loeff. “That’s a problem in Europe as well as in the U.S.,” he added.

The worldwide accounting fraud that sent Belgian voice technology firm Lernout & Hauspie Speech Products NV into bankruptcy last year has been described as a mini-Enron. Like Enron, L&H allegedly created essentially fictitious companies to boost revenue. It, too, used one of the big five accounting firms, KPMG Consulting Inc.

Also like Enron, L&H filed its accounts using the U.S. accounting standard GAAP (generally accepted accounting practices). Three weeks ago a top European Union official, Commissioner Frits Bolkestein blamed GAAP.

He said the Enron scandal was facilitated by the “cookery book” approach of GAAP rules and urged the United States to abandon them and instead adopt international accounting standards (IAS) that European Union countries have only recently agreed to.

Bolkestein also urged the United States to permit European companies listed on the U.S. financial markets to file their accounts under IAS. At present they must apply GAAP in order to be listed in the United States.

The European Union aims to have all European companies applying a single set of accounting and financial rules by 2005 and the IAS standard for auditing is seen as central to that aim.

Apart from Bolkestein’s recent attack, GAAP rules have generally been held up as a guide for good governance. Many national stock exchange and accounting rules within the E.U. are still criticized for being un-transparent by GAAP standards. This lack of clarity at a national level has been blamed for the European Union’s inability to attract investors as the U.S. does.

(George A. Chidi, Jr., in Boston, contributed to this report).

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