How Bush Þrm used accounting scam
Tuesday July 9, 2002
Today, George Bush is scheduled to give a speech intended to put him in front of the growing national outrage over corporate malfeasance. He will sternly lecture Wall Street executives about ethics and will doubtless portray himself as a believer in old-fashioned business probity.
Yet this pose is surreal, given the way top ofÞcials like secretary of the army Thomas White, vice-president Dick Cheney and Mr Bush himself acquired their wealth. As Joshua Green says in the Washington Monthly, in an article written just before the administration suddenly became such an exponent of corporate ethics: ÒIn this administration, enriching oneself while oneÕs business goes bust isnÕt necessarily frowned upon.Ó
Unfortunately, the administration has so far got the press to focus on the least important question about Mr BushÕs business dealings: his failure to obey the law by promptly reporting his insider stock sales. The administration hopes that a narrow focus on the reporting lapses will divert attention from the larger point: Mr Bush proÞted personally from aggressive accounting identical to the recent scams that have shocked the nation.
In 1986, one would have had to consider Mr Bush a failed businessman. He had run through millions of dollars of other peopleÕs money, with nothing to show for it but a company losing money and heavily burdened with debt. But he was rescued from failure when Harken Energy bought his company at an astonishingly high price. There is no question that Harken was basically paying for Mr BushÕs connections.
Despite these connections, Harken did badly. But for a time it concealed its failure - sustaining its stock price, as it turned out, just long enough for Mr Bush to sell most of his stake at a large proÞt - with an accounting trick identical to one of the main ploys used by Enron a decade later. (Yes, Andersen was the accountant.)
The ploy works as follows: corporate insiders create a front organisation that seems independent but is really under their control. This front buys some of the ÞrmÕs assets at unrealistically high prices, creating a phantom proÞt that inßates the stock price, allowing the executives to cash in their stock.
A group of insiders, using money borrowed from Harken itself, paid an exorbitant price for a Harken subsidiary, Aloha Petroleum. That created a $10m phantom proÞt, which hid three-quarters of the companyÕs losses in 1989. White House aides have played down the signiÞcance of this manoeuvre, saying $10m isnÕt much, compared with recent scandals. Indeed, itÕs a small frac tion of the apparent proÞts Halliburton created through a sudden change in accounting procedures during Dick CheneyÕs tenure as chief executive. But for HarkenÕs stock price - and hence for Mr BushÕs personal wealth - this accounting trickery made all the difference.
Mr Bush was on the companyÕs audit committee, as well as on a special restructuring committee; back in 1994, another member of both committees, Stuart Watson, assured reporters that he and Mr Bush were constantly made aware of the companyÕs Þnances. If Mr Bush didnÕt know about the Aloha manoeuvre, he was a very negligent director.
In any case, Mr Bush certainly found out what his company had been up to when the securities and exchange commission ordered it to restate its earnings. So he canÕt really be shocked over recent corporate scams. His own company pulled exactly the same tricks, to his considerable beneÞt. New York Times