In the world of big business, profits may be losses, and a firm that "continues to stabilise" could be unstable

The collapse of Enron is making a lot of people scared - and I am not just talking about people in the White House and Downing Street. No, anxiety is most acute among the oilers of the wheels of capitalism: the auditors, investment bankers and assorted leaders of industry. For years, many of them have been collaborators in the dubious practice of pumping up corporate profits.

Without recourse to illegality, there is plenty of scope within the accounting rules to economise on the financial verite. And there are two reasons for thinking it happened on a large scale. First, too many companies were year after year reporting 20 per cent growths in profits, even though this was a period of intense price competition, and growth in the economies of the west ranged from 2 per cent to 4 per cent. Second, the accounts of too many companies show a disparity between profits growth and cash-flow growth, which in the round indicates that figures were massaged.

Nobody blew the whistle in the boom-boom years, because the fiction of supernormal profitability was wonderful: everybody got richer. Enron spoiled it all by going too far.

The liabilities facing Arthur Andersen, Enron's auditors, from lawsuits and assorted investigations are potentially ruinous. So guess what? The sleeping policemen of the free market economy, the big accounting firms whose role it is to sign off corporate accounts, are being awakened.

The stock market has taken fright, on the assumption that companies will now be forced to disclose their financial performance in rather more gory detail than hitherto. So investors are becoming wary of any company with less-than-transparent accounts. A substantial Irish pharmaceutical company, Elan, has just seen its shares fall more than 70 per cent because of concerns about the quality of its profits. Even shares in the biggest and bluest of blue chips, Microsoft and General Electric, have been affected.

However, the threat is greatest for the many companies that combine questionable accounting techniques with a high level of debt. When shareholders take fright, the consequences are not nice. But when banks and creditors take fright, the consequences are far more serious. It does not take many Enrons to turn mild recession into deep downturn.


Meanwhile, one industry that was supposed to be immune from the harsher economic realities was mobile phones. Not any longer. MMO2, the mobile business that was owned by BT until last year, is reducing employee numbers in the UK by 1,400 from 6,100, and is shutting 133 out of 320 stores. Smaller reductions are being made in Germany.

Of the big European mobile operators, MMO2 is the most vulnerable, because its UK business lost ground under BT's stewardship in the late 1990s and its German business is far too small. On the other hand, all operators - Vodafone, Orange, Deutsche Telekom, and so on - are gradually facing chronic excess capacity and slowing growth of demand.

The thing about these companies is that the perception of them as hugely successful, money-making machines never quite matched the reality. By conventional measures, they have been egregious loss-makers. Vodafone, in the six months to 30 September last year, made a loss after tax of £9.7bn (yes, billion).

But clever old Vodafone has been adept at persuading the stock market to ignore the big numbers in its accounts that have a minus sign in front of them. It highlights something called EBITDA (earnings before interest, tax, depreciation and amortisation) which, joy of joys, increased 46 per cent to £4.8bn (billion again) before "exceptional items".

I will not numb you with a detailed definition of EBITDA. You will have to take my word that it tells you almost nothing about the two most important statistics for investors: what kind of return the company is making on its investments, and what level of dividend it can afford to pay now and in the future. My view is that Vodafone is some way from proving it can earn a proper return on the more than £125bn (oh yes, billion) it spent on buying rival companies and phone licences in the late 1990s.

To do so, it needs cut-throat competition between the operators to ease and it needs something called ARPU (funny how these companies love impenetrable acronyms) to increase. ARPU is average revenue per unit, or how much Vodafone manages to take off each of its customers. In July last year, Vodafone announced that "key performance indicators show ARPU stabilising", which seemed reason to cheer a great British success. Three months later, Vodafone shouted that "ARPU continues to stabilise". And a few days ago, Sir Chris Gent, Vodafone's chief executive, stated: "Adjusting for the seasonal effect, ARPU continues to stabilise."

I am obliged to point out therefore that, for much of the past year, Vodafone's ARPU has been "continuing to stabilise" without actually becoming stable. Can something "continue" to stabilise for such an extended period?

What Gent should have said, in plain English, is that average revenues per unit have continued to drop. So, perhaps unsurprisingly, Vodafone's shares have been stabilising over the past few days, and I suspect they will continue to stabilise till they are a lot cheaper than they are now.

Robert Peston is editorial director of QUEST; www.csquest.com; e-mail rpeston@csquest.com