Two Historical Perspectives - Samuel Insull and Charles Keating

Two other situations this century involving similar techniques include those of Charles Keating, who first destabilized and then later plundered the Savings and Loan system and Samuel Insull who was President of Edison Electric, the great technology company of the 1920's. Insull was a national hero in the 20's yet came to be recognized as a symbol for what caused the great depression in the 1930's. Sadly, his good intentions and significant charitable and civic causes did not include ensuring the financial integrity of his company. He died of a heart attack in 1938, penniless, in a Paris subway station, exhausted from years of fighting lawsuits for fraud. Interestingly, he was never convicted.

Many believe that the stock market crash of 1929 caused the Great Depression yet history clearly shows that it was instead simply bad government policy that was manipulated by leaders such as Insull. Today many now fear a similar stock market crash but in reality the economy is very strong and, if we can reform this pyramid at Microsoft, the overall market should not need to correct more than 20 percent. What is most likely to occur is a structural shift within the S&P 500, not unlike what occurred with HMO's, in which Microsoft and a small group of large tech stocks grossly misreporting their earnings decline while other companies in the index increase. Another more recent example might be Waste Management, another monopoly that used pyramid like accounting techniques only to be forced to restate several years of earnings. Key to both these situations are estimating techniques that grossly underreported debt pyramids and operating costs.

Most unusual about Microsoft's situation is that they pride themselves in being a leader in setting "conservative" accounting standards. It is also noteworthy that the previous CFO, Mike Brown, was aggressive in setting accounting standards and also simultaneously Chairman of the Board of the Nasdaq stock exchange while CFO at Microsoft. It is hard to imagine a more direct conflict of interest given that Microsoft is the largest listing on the exchange.

Mr. Brown also hired his former boss from Deloitte and Touche to be internal auditor at Microsoft. When this respected former partner of Deloitte told Mike that what they were doing was illegal and constituted securities fraud he was given the option to resign or be fired, according to an ABC News Story. He later was awarded $4 million under the Federal Whistleblowers Act.