Fawlty optimism

A CONNECTION between Fawlty Towers and the International Monetary Fund may seem unlikely. But an IMF review reminds me of one episode.

A health inspector is enumerating a huge list of unhygienic failures in the hotel. He pauses for breath. John Cleese intervenes hopefully 'Otherwise fine?'

The review notes (with a hint of scepticism) the resilience of the financial markets, despite the bursting of the internet technology bubble, 11 September, the US recession, the global slowdown, record company collapses, the largest US bankruptcy ever and Argentina's default.

Otherwise fine? Well, not really. We might add NTL, involving a record wipe-out of shareholders by bondholders, AOL's all-time record write- off, the collapse of Andersen, the accelerating problems in telecoms, pension funds suddenly looking wonky, investment banks facing prosecution in New York for falsifying share recommendations, and auditors under official attack for systematically inflating profits.

Otherwise fine? There is certainly a resilient mood now in most markets.

The consensus of analysts' forecasts for profits next year in the US has been spurred on by the minirecovery, though they have recently faltered. However, we are told that Wall Street analysts systematically lie to get business for their investment banks. Also that auditors, though not systematically lying, do not strive officiously to tell the truth.

Where does that leave us? In Russia in the 1930s, the national plan was constantly frustrated by factory managers' untruths about their output. The Gosplan statisticians tried to work out a 'coefficient of lying' to correct the managers' claims.

A business school might try working out a coefficient of lying for Wall Street and perhaps some other markets. The so-called 'bottom up' figures for analysts' forecasts of profits are all on the record. And the real profits totals, as opposed to auditors' claims, are also available in the US.

Economist Matthew Wickens offered an interesting starting point in an ABN Amro study last autumn, suggesting that a useful rule of thumb, based on many years' performance, would be that if the macro-forecast for profits was a 2% fall, then companies in the S&P 500 would report a rise of 0.5%. That tells us something about aggressive accounting. For analysts, he finds that for the 1990s, the overall inaccuracy of their combined forecasts was 50%.

The problem is also compounded by the tendency of these forecasters to reduce their claims as the actual announcement of profits nears. You don't want to appear too silly, do you ?

The over-forecasting may now subside. The legal authorities are on the lookout. But caution is still indicated.

Sue far sue good
EQUITABLE'S decision to sue the ex-directors personally, possibly into bankruptcy, must make even the most conscientious hesitate about a non-exec role. Perhaps one needs to put the house in the wife's name first.

After all, the old board agonised over the guaranteed annuity rate problem and took extensive advice over its decision. Equitable is already suing accountants Ernst & Young, which underlines the fact that the former directors used top level advice. Besides, the High Court firmly upheld the board's action in the original court case.

I suspect that the current directors are suing the former - despite the fact that a victory (unlikely) would produce a drop in the ocean, and vast legal fees - for fear they in turn might be sued - for failing to sue! Such is the litigious atmosphere these days.

Note to Derek Higgs and his inquiry: you must not dodge this one.