From:†††††††††††††††††††† Noel Hodson []

Sent:††††††††††††††††††††† 03 July 2002 13:55

To:††††††††††††††††††††††††;;;;;;;; Mike.Hall1@BellSouth.COM;;;;;;;;;;;

Cc:†††††††††††††††††††††††† Evan Davis - BBC; Christine Lester WMTL; Andrew Smith; Gil@Gilgordon. Com

Subject:†††††††††††††††† After ENRON - The Future of Auditors & Pensions - in the Information Society.





3rd July 2002.


Where and What Next?


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.



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 thetime 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.




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 auditing guideline 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 citizenís mind, were the powerful, skilled and hugely well paid City/Wall Street pension fund managers while the Directors and the Auditors were fiddling the books on such a gargantuan and global scale?


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 UK are "homeworkers". The EU forecasts 16%-18% by 2006.


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