Jack TenneyExtra Point

by Jack Tenney, Publisher

February 2002

On book cooking and money laundering

On book cooking and money laundering, Enron didn't invent them, you know.

Once, I was negotiating the sale of a manufacturing company to a Swiss company. Very nearly the first question I was asked had to do with the color of the books.

"Color? What do you mean?" I replied.

He explained, "White books are for the income tax, blue books are for the franchise taxes (taxes based on asset values), red books for management incentives and like that."

"We only have one set of books and they're either green or black, depending on the stationery store the office manager likes," I said.

He scoffed, "Black! We only use black books for our Italian operations."

"Why? What's with Italy?"

He explained, "You can't take profits out of Italy."

"So?"

"Every couple of years, we rob it."

"What?"

"We liquidate as much of the company's profits as we can into hard currency, put it in a safe and hire some guys to rob it."

"Geezum!"

Needless to say, I wasn't able to do a deal with him.

The reason we were selling the manufacturing company (our largest subsidiary) had to do with a CPA firm, psychological factors and my personal sleepiness. I was a big fan of MBO (Management by Objectives) and stayed out of the working pit, depending on financial statements and management audits to prosecute my responsibilities as the chairman of the board. The president of the subsidiary was a real pro and a very imposing person tall, deep voiced and, apparently, quite autocratic. Since I'm fairly tall and well endowed with ego and voice AND he worked for me, he was always extremely nice to me so I never knew about the autocratic thing.

However, the controller was diminutive, unassertive and, again, apparently, easily cowed. The company had launched a new product line with a lot of pieces and parts, which I was led to believe was the reason for a huge increase in inventory. I happened to be making my monthly visit to the plant as the annual inventory-taking was being observed by our CPA firm (not Arthur Andersen, but an equally well-respected big eight firm.) While scanning the inventory details and counting the minutes until I could race to catch a flight home, I noticed a huge amount of some part that indicated we had a decade's worth of it on hand. I barked at the president whose office I was sharing for the day, "What the hell is this? You got $10,000 in penny parts for the CIB-412s!"

"No!" he said, grabbing his copy of the tally.

Shortly, he said, "Someone's added a zero to the count!"

To make a long story short, the controller had faked the inventory by adding zeroes or making nines out of ones to cover a quarter of a million dollar shortage. He didn't do it to finance bad habits, fast women or slow horses. He did it month by month so his boss wouldn't yell at him, and then tried to cover a year's worth of fudge with a baked cake.

I missed my flight.

That was two bad things in one day.