PARIS - France has put out the welcome mat for foreign investors. But do foreign investors always know what they are buying?
While Alain Madelin, France's new finance minister, recently promised that any remaining restrictions on foreign investment in French stocks will be eliminated, investors still have a lot to worry about when it comes to understanding the nuances and accounting games played in corporate accounts.
From shopping for the most favorable accounting standards to taking big write-offs to smooth out earnings, French companies have been window-dressing their accounts as never before. Yet none of these accounting practices is illegal, and auditors certify the accounts. The message for shareholders is clear: what you see is not necessarily what you get.
Renaud Saleur, a portfolio manager in the Paris office of Fidelity Investments Luxembourg S.A., said: "Net profit figures are meaningless. You can pretty much massage them as you like." More information can be garnered from the change in a company's financial position or in its cash flow statement, he said.
Didier Kling, chairman of the National Association of Certified Public Accountants, Paris, wonders whether "French accounting is still credible." French regulators have been scrutinizing company accounts.
Still, some are optimistic that reporting is improving. Herve Lemee, chairman of Detroyat Associes, an independent research firm, Paris, said, "The quality of financial information is better than it used to be in France. Companies worry more and more about their shareholders and the (Commission des Operations de Bourse), and the financial community has been proactive."
Here are some examples of how French companies have been playing with their books:
Shopping for standards
French companies have shown no qualms about playing with different accounting principles. Under law, French holding companies must publish their accounts for the parent company but may choose from two sets of principles for consolidated financial statements.
Usually, French groups apply international accounting standards or U.S. generally accepted accounting principles. But some companies like to mix and match, using whichever standard suits them best.
For example, Paris-based Group Danone S.A., France's largest food group, in its 1994 annual report, said the company conformed to French accounting principles and "valuation methods provided by the U.S. GAAP .*.*. with the exception of trademark amortization where U.S. GAAP rules will not be used."
This way, Danone avoided amortizing more than 10 billion French francs ($2 billion) worth of trademarks, which otherwise would have reduced the company's consolidated net earnings by 263 million francs.
"Unlike U.S. companies, French companies show little concern for the underlying value of their assets and its impact on their stock valuations," said Philippe Garnier, partner with Coopers & Lybrand in Paris.
Alternatively, some companies switch accounting standards.
Paris-based Pechiney S.A., which to date has used international accounting standards, said it will switch to GAAP for its 1995 accounts, to take advantage of 40-year amortization under U.S. rules. International accounting standards have been toughened, starting this year, with amortization reduced to 20 years.
Other companies - including oil giant Total S.A., Paris, and defense contractor Thomson-C S F, based in Puteaux - might switch to U.S. accounting rules.
Elsewhere, oil giant Elf Aquitaine, Paris, used a future GAAP standard to depreciate some of its industrial assets.
Playing with provisions
French companies frequently massage their results by charging against earnings expenses related to probable risks. This can be used to make corporate management look better.
For example, when Michel Pebereau became chairman and chief executive of Paris-based Banque Nationale de Paris in 1993, he charged 7.7 billion francs to earnings to write off real estate and corporate losses incurred under his predecessor, causing profits to plunge 53%.
When profits rebounded by 75% the next year, Mr. Pebereau appeared to be just the medicine the bank had needed. French analysts call this the "presidential effect," indicating how changes in top management lead to games-playing with the books.
Conversely, when David Suddens was named chief executive of Dollfus-Mieg & Cie S.A., a Paris-based textile concern, he was not permitted to write off 260 million francs in restructuring costs in 1994. If the write-off had been taken, it would have reflected poorly on Julien Charlier, who had just been moved upstairs to chairman from chief executive. Mr. Suddens subsequently resigned.
Sometimes companies take charges only to reverse some of them later. For example, Usinor-Sacilor, a Paris-based steel group, traditionally had made charges for expected maintenance. In 1993, it switched accounting methods, which meant completed maintenance no longer would be charged against profits. Instead, the incurred expenses would be amortized over time. The company then sought to cancel the previous charges, which caused it to record exceptional profits of 2.5 billion francs. The following year, the COB said the charges should not have been reversed.
Some companies are loath to take write-offs because charges would threaten corporate profitability. In 1994, Paris-based Groupe des Assurances Nationales S.A., a state-owned insurer, was very reluctant to take a 2.3 billion franc write-off for real estate losses incurred by its UIC-Sofal subsidiary, one expert said.
Similarly, Mutuelle Assurance des Commercants et Industriels de France S.A., a Niort-based insurance company, resisted taking a hit. Under pressure from its auditors and insurance regulators, the company recently published a 293 million franc loss, with a 300 million franc provision.
Valuing assets
Chief financial officers often are creative in valuing corporate assets.
For 1994 accounts, Philippe Jaffre, chairman and chief executive of Elf Aquitaine, employed a U.S. rule before its effective date, an unusual move.
What Elf did was value its U.S. oil wells and a few other assets at their market cost instead of book value, thus enabling the company to write off 9 billion francs and register a 5.4 billion franc loss. Taking the big hit was received warmly by the stock market.
Amortizing goodwill following an acquisition is another way French companies play with their books. Goodwill, under French law, is the difference between the purchase price and the book price of target companies. Pechiney, determined to depreciate the goodwill from its 1988 acquisition of American National Can, thus opted for U.S. principles and their 40-year amortization period.
Pension and other benefit obligations also can be manipulated. Companies have the choice of recording pension debts on the balance sheet as liabilities or as off-balance sheet obligations.
"Any serious financial officer will make an allowance for them in the balance sheet," said Michel Cloix, chief accountant of Paris-based Aerospatiale S.A., the airplane and spaceship manufacturer.
But most companies don't. For example, even profitable Clichy-based cosmetics giant L'Oreal S.A. recorded 931 billion francs of pension debt as an off-balance sheet obligation.
Mega massaging
To massage profits and losses, companies may choose to include or exclude the revenues and earnings of subsidiaries.
In 1993, for example, Chargeurs S.A. decided to consolidate the accounts of broadcast company BskyB into the Paris-based textile and media group's earnings - even though Chargeurs owned only 17.5% of the telecommunications firm. But BskyB already was very profitable and promised better results for 1994.
Conversely, Peugeot S.A., Paris, declined to consolidate the accounts of its foreign subsidiaries, as is allowed under French accounting rules. But under GAAP, which Peugeot otherwise follows, Peugeot should have consolidated profits and losses on a global basis - which, taken in total, were in the red.
But the gold medal for window dressing goes to companies that record non-recurring profits.
"There is nothing wrong with (the practice) provided it is not hidden," said Rene Ricol, president of Conseil Superior de l'Ordre des Experts-Comptables, the French auditors association.
In 1992, Clinvest, a subsidiary of Credit Lyonnais, France's largest bank, sold shares of Lyonnaise des Eaux and BSN at a total of 762 million francs. It repurchased the shares a few days later - but was able to book the profits.
It's easy for companies to record non-recurring gains, in part because French rules are vague and confusing. French rules even speak of "repetitive non-recurring profits" - an oxymoron.
Conversely, some companies fail to record losses, such as those stemming from interest or exchange rate losses. Societe d'Exploitation Industrielle des Tabacs et Alumettes S.A., a Paris-based tobacco manufacturer, was permitted by the COB to "freeze" its 1.7 billion franc bond portfolio - avoiding reporting a 176 million franc loss - to enable the company's privatization to proceed.
Experts believe there is a need for greater consistency among the minefields of French accounting. Detroyat's Mr. Lemee hopes the number of accounting options in Europe are reduced and international standards are adopted. With a recently announced move away from developing European standards and adopting international standards by 1999, that may be in the works.