Winds of war chill the markets

THE sudden weakness of the past few days could simply be stock markets reacting to the frothiness of August trading and getting themselves back on a more realistic footing. Or it could be they are beginning to take seriously the prospect of a war with Iraq.

The view from the White House that President Bush does not need the approval of Congress to open hostilities, and the bellicose speech from Vice President Dick Cheney who said the risks of inaction were much greater than the risks of action, seem pretty clear cut. But because they seem to signal a hardening of the mood they have at last grabbed the attention of markets, which had hitherto refused to pay much attention to the prospect of war.

People who remember the Gulf War tend to say that markets finished it at much the same level as when it started. That is true, but it misses a few relevant points. First, the West won that war relatively easily but markets looked pretty sick until the outcome was beyond doubt. Second, though markets came through in good shape, the spike in oil prices provoked a worldwide economic slowdown. Third, stock markets in Europe and America were on much lower earnings multiples and therefore much less vulnerable on the down side at that time than they are now.

The problem for investors is that sabre-rattling or even formal preparations for conflict could go on for months, during which period the market is likely to remain highly stressed. No one can know in advance what the effect is likely to be on oil prices, or the stability of the Saudi regime, or the entire Middle East.

There is a possibility that the affair will turn out to be much more messy, costly, protracted and less clear cut than the Americans believe. Markets are right to be nervous, and if the present pattern of rhetoric continues they will be right to remain so.

Reputation risk

IT PASSED without notice here, but as of last weekend Andersen, the accountancy firm, ceased to be auditors of publicly-quoted companiesin the United States. None of the 1,200-plus publicly traded companies it audited when it was convicted of obstructing justice by shredding documents connected with Enron less than seven months ago are still clients.

More than 300 each have gone to Ernst & Young and KPMG, Deloitte & Touche has taken on 260 and 179 have gone to PricewaterhouseCoopers. The balance have still to decide or have opted for a smaller auditing firm.

Of the 28,000 employees Andersen had in the US at the beginning of this year, fewer than 3,000 are left today. Henceforth their work will largely consist of fielding lawsuits from disgruntled investors and claims from former partners furious at the way their pensions have been shrunk. This work is likely to last until one of the legal claims is lost in court, at which point the firm is expected finally to fold its tent because there is almost no money left to meet any settlement.

Nothing has become the firm more than the way it has handled its own demise. Even competitors have been impressed at the quiet efficiency with which Andersen has wound itself up. But it is astonishing that a firm of this scale could disappear so quickly. It is a hugely significant warning to everyone in business of the importance of reputation and the perils in a lack of understanding of the nature and consequence of reputational risk.

It bears repeating that in seven months a worldwide firm, the leader in its field, has seen its reputation and business destroyed by mistakes made in just one of its offices. Those who seek to run global businesses should dwell on that and ask themselves how they can be absolutely sure there is not the equivalent of a Houston office somewhere in their organisation.