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"Hucksters Turned Preachers"

In this week's leader (subscription only), the Economist brings a welcome perspective to the current corporate scandal crisis in America:

It is true that bosses of companies such as Enron and WorldCom violated investors' trust and brought ruin on their companies' owners. It is right that, having been found out, they should be punished, not excused. But everybody should at least bear in mind that these benders and breakers of the law had lots of help -- not just from the auditing profession, which stands alongside them in the dock, but from many of the same people now crying out for retribution.

Hucksters turned preachers
If you think back to the mood, pre-bust, you will recall that every kind of analyst (with a mere handful of noble exceptions) was cheering the market on, creating an atmosphere in which anything less than double-digit growth in profits was regarded as a sign of timidity. The media stoked the fires of impossible expectations with an unfailing supply of corporate hero-worship; with their mindless praise for innovation (however worthless); with news for day traders, new-economy stockmarket indices and the rest; with their idiotic dedication to the maxim that you either get it or don't get it. At critical moments even the Federal Reserve added fuel. And investors themselves were so entranced by their surging wealth that they more or less willed companies to lie to them. “Pro forma” earnings? Fine. Bald-faced deception? Pile it on. Whatever it takes to keep the good news coming.

While the American media are shocked, shocked to learn about these problems, the Economist rightly points out how so many people -- media included -- were at the very least accessories to deception.

At a conference a couple of years ago, I heard Eric Schmidt (then of Novell) joke about a new accounting term: "Earnings Before Expenses." If the bubble had persisted, would a firm have actually tried it (or something only slightly less ridiculous)? Once so tried, would an analyst have endorsed it? Once so endorsed, would investors have bought it? I think we all know the answers.

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