Shiatsu for your balance sheet - a beginner's guide

Following the Enron scandal investors are paying more attention to the way companies draw up their accounts, and they're not liking what they see.

The long-distance carrier side of the telecoms industry has come under particular pressure for a range of dubious practices.

Chief among these are swaps. Telecoms companies often buy and sell network capacity to each other, which is usually a legitimate practice.

It's often cheaper to extend networks by buying capacity than by laying new cables. Or, if two companies run cables across the sea, they swap capacity so that if one of the cables gets cut, both companies' customers still have a connection.

However, many of these swaps have been used to boost financial performance rather than network capacity.

The sale goes straight to the profit-and-loss account, where it boosts the company's apparent revenues. For many telecoms companies, which are actually making a huge loss, revenue is the figure which many investors use as a guide for assessing performance.

However, if the sale is only made against a corresponding purchase, it doesn't bring any cash in to the company.

In some cases, the value of the 'sale' all appears on the financial results at once, even though the contract may last 20 years, while the corresponding purchase may be booked across 20 years. Yet none of these practices is actually illegal, and many companies freely admit to doing it.

The increasing number of bankruptcies in the telecoms sector has brought more of such practices to light as auditors trawl through the accounts of failed companies.

The collapse of Global Crossing, in particular, has set off a train of events that could spread to many other companies.

The bankrupt Global Crossing is being investigated by the FBI, and the US Securities and Exchange Commission is investigating Qwest, though the company insists that the investigation is only in connection with Global Crossing - at least for the the moment.

Even the relatively well-regarded KPNQwest has admitted that 15 per cent of its revenue came from sales to networks that also sold capacity to KPNQwest.

Cable and Wireless has admitted that it swapped capacity with other operators and admitted that it added the value of these operations to its balance sheet straight away, even though some of the contracts are 20 years long.

All of these accounting practices are perfectly legal, although telcos deny the practice of "hollow swapping", which sees companies trading capacity at inflated prices, a practice that is actually illegal.

Accountants are always seeking to massage their financial results and scandals similar to Global Crossing have recurred with depressing regularity. The regulators are always one step behind the most creative of accounts.

As soon as one loophole is closed, another one seems to open.