UBS Phillips and Drew in row with Terry Smith over book.
By Jeff Randall
Appeared in The Sunday Times on 16 August 1992
Just when most City reporters were panicking at the dearth of real news, along comes Terry Smith with his controversial book on corporate accounting, and bingo, we have a David and Goliath punch-up to keep us going through the torpor of the August holiday season.
The row between Smith and UBS Phillips and Drew, where he was suspended last week as head of UK research, is intensifying by the day. The book, Accounting for Growth, has seriously ruffled feathers among those companies he suggests are using financial funnies to make profits appear better than they really are.
For investors trying to hack their way through the accounting jungle, Smith's golden rule is: cash is king. Profits can be inflated (or even invented) by creative accounting, but there is no such thing as creative cash.
According to Smith, cash is more important than profits because it pays dividends. Moreover, the lack of hard cash explains why many businesses fail.
Companies making profits can still go bust (come in Polly Peck, your time is up); unlike cash-rich groups, without debt.
Smith's reasoning is undoubtedly sound, but it inspires a certain sense of deja vu. Haven't we read this argument somewhere before?
Of course we have. Step forward Lord Weinstock, managing director of GEC and legendary hoarder of cash. When asked by the Financial Times earlier this year why he was so obsessive about generating cash, he replied: "If you think you make a profit, it is reassuring to see it in the form of money. When people are making a profit but not making money then we have learned to become suspicious." Quite so.
Smith, meanwhile, has done more than just offend City sensibilities and torpedo the share prices of some big Footsie stocks. He has incurred the wrath of the accountancy profession.
Lacerated by his criticisms of industry standards, Ernst and Young, one of the world's biggest accountancy firms, has hit back.
According to David Wilson, a partner at the firm: "We have seen a draft of Smith's book and the analysis is very superficial. As a guide to potential company failures, it is both dangerous and irresponsible.
"If big institutional fund managers are guided by this type of superficial analysis, it is a cause for grave concern."
There speaks an interest group defending its patch.
© The Sunday Times