Tuesday, July 03, 2007

Lies, Corruption and Deception in the Global Village

Many of our correspondents are exceptionally well-informed and experienced. One such is J.B. who had these observations on the reliabiliy of financial data from overseas firms. J.B. was responding to an entry here on tainted/defective imports from Asia; his comments reveal that all the various shades of lying--omissions, claims of ignorance, deceptions, corruption, etc.--are not limited to foodstuffs but are endemic to the world of finance as well.

"You know whenever I see a company run by anyone outside of Germans, English, Scandanavians, Canadians and English, you know I do not believe a word they say (not that the above group is exempted but let us say the degree is not quite as severe).

Editor's Note: you can find various rankings by nation for ethics/corruption on the Web. One source is Transparency International which released The 2006 Transparency International Corruption Perceptions Index. While some may jump to the conclusion that such rankings are somehow racist, note that Singapore consistently ranks high on ethics rankings. Thus it is possible for Asian nations to do business ethically and transparently but most apparently choose not to, or are incapable of doing so.

About a year ago I was hired by a Wells Fargo external attorney to testify against a New Zealand CFO for a US public company. She quite honestly was incompetent and attempted to lay off her responsibility on the auditors. Since I worked 10 years for Arthur Andersen (when it was still reputable and also the largest accounting firm in the world) as well as 8 years as CFO for public companies they thought I was the perfect witness to counter her testimony. She ended up pleading guilty after my deposition.

I spent a number of years working outside the US for AA in Australia, some Asia, Canada, the Middle East and Europe. In many countries their financials once you get below the surface scream fraud. When I was in Australia, there was a Canadian in the office who said, "he forgot how bad it was until I got there." Financial information out of China, India and Russia makes me giggle to think how unreliable it is. Work in finance there and not generate the results management wants you very likely will end up dead (I have a friend who can tell you personal experiences).

You would have to be a total moron to own stock in companies in any of those countries. Part of their culture is along the lines of, if you are so stupid to trust me and give me money, it is my duty and responsibility to take the money for myself.

It would be comical if it was not so sad!"

But isn't the entire "emerging markets miracle" of skyrocketing stock prices based on the financials of these overseas companies? What can we make of the "miracle" if the numbers are untrustworthy? By that I mean, would the financial reports of these emerging-markets high-flyers withstand a fair and honest audit performed according to the accounting standards which regulate U.S. public companies' reports?

My own reading on the subject suggests that privately, nobody with any experience in the field would stake their career or money on the reliability of most overseas companies' financials. It's just one of many "dirty little secrets" that's tolerated in order to make as much money as possible in the least amount of time, i.e. before the entire rotten structure blows up/collapses.

Moving back to food, it is worth recalling that abysmally unhealthy food processing was rampant about a century ago in the U.S. Upton Sinclair's 1906 expose, The Jungle , tore the lid off the lies and deceptive practices, and an outraged public demanded safety regulations and enforcement. (The two are not identical; you can have all the regulations in the world but if they're not enforced in a non-corrupt fashion, they are meaningless.)

Let's check back in on the latest wave of findings regarding food imports from China:

Firms increase scrutiny of Chinese ingredients: As imports climb, companies trying to head off problems

In other words: since the governments of China and the U.S. have both failed U.S. consumers, U.S. companies are finally wakig up that it's their responsibility to vouchsafe for the safety of their products.

U.S. Detains Farmed Seafood From China.

But it's all safe now. Right.

Chinese fish import ban might affect markets; Country supplies lots of frozen shrimp and catfish to U.S.

Tainted Toothpaste Found in US Prisons; safety issues widespread.

"Also Wednesday, Beijing police raided a village where live pigs were force-fed wastewater to boost their weight before slaughter, state media reported.

Plastic pipes had been forced down the pigs' throats and villagers had pumped each 220-pound pig with 44 pounds of wastewater, the Beijing Morning Post reported Thursday.

Paperwork showed the pigs were headed for one of Beijing's main slaughterhouses and stamps on their ears indicated that they already had been through quarantine and inspection, the paper said. Suspects escaped during the raid and no arrests were made, it said.

Earlier this week, inspectors announced they had closed 180 food factories in China in the first half of this year and seized tons of candy, pickles, crackers and seafood tainted with formaldehyde, illegal dyes and industrial wax.

"These are not isolated cases," Han Yi, an official with Wei's quality administration, was quoted as saying in Wednesday's state-run China Daily newspaper.

Han's admission was significant because the agency has said in the past that safety violations were the work of a few rogue operators — a claim aimed at protecting China's billions of dollars of food exports."

In other words: you can't trust Chinese suppliers, Chinese government agencies, U.S. government agencies or the U.S. companies importig the food products. What possible actions are going to establish a level of accountability and trust which would cause you to risk your life and start buying Chinese tires, toothpaste, seafood, etc. again?

Realistically speaking, the system is so broken it seems impossible that any such verifiable trust can ever be established. Think this through: The U.S. corporation insists that the products are inspected and certified. Wow, great oversight here. Ah, but the tainted/adulterated food has already been inspected and tagged as safe. How exactly do you get around this? You can't, unless you post the equivalent of an FDA inspector at every food plant in China--and the inspector would have to be a native speaker, and politically powerful enough to be protected from threats. If you think this is possible at any price, please read on: China Faces a New Worry: Heavy Metals in the Food: (Wall Street Journal, subscription required but you can always read it for free at the Library)
this is a parody

"Concerns are mounting internationally as China plays a growing role in the global food industry. The country's exports currently account for about 12% of global trade in fruits and vegetables. China's agricultural exports to the U.S. rose to $2.26 billion in 2006 from $133 million in 1980, according to the U.S. Department of Agriculture.

Other governments, including Hong Kong and Japan, systematically test imports from mainland China for metal contamination. But the U.S. FDA says it does virtually no routine testing of food imports for metals. Most of its standard tests on imports are aimed at identifying pesticide residues. Some state health departments and retail chains do their own testing for metals.

Foods from China containing high levels of lead have occasionally been discovered on U.S. supermarket shelves. In 2005, California issued a recall of sweet cured plums from the country after a routine spot test by state health inspectors found "excessively high levels of lead that could cause serious health problems."

Rudimentary sewage-treatment systems throughout much of China mean that organic waste is routinely mixed with industrial waste. When sewage is recycled into fertilizer, it may contain large amounts of metals and other toxic material.

China's soil is also compromised by waste from the thousands of private and public mines that dot the country.

Chinese scientists tested samples of soil and vegetables, including cabbage, chrysanthemum and spinach grown in the area around the mine, near Shaoxing in Zhejiang province. The soil's zinc level was 20 times higher, and cadmium levels 30 times higher, than the maximum heavy-metal concentrations allowed under China's national soil-quality standards."

In summary: the health of the food supply system in China is compromised at the systemic/fundamental levels of soil, water and air. The government does not have the resources to adequately test, inspect and enforce safety regulations on tens of thousands of producers.

Our own government has extensive food safety agencies--take a look at National Food Safety Programs for a complete list--but if they can't test any Chinese food products for heavy metals, it's clear they are overwhelmed by the task. And if you know the products aren't being tested by a trustworthy agency, then why put the product in your body? Is the savings (if any) worth your health?

Bottom line: hey, if you have to lie to make a buck, then you lie. The hapless consumer / investor is far, far away, and is powerless to come after you. So why stop lying?

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