Hungary Says Its Books Were Cooked

By Megan McArdle

There's a saying I've heard from accountants:  recessions uncover what auditors can't.  When a company has reasonable cash flow and access to credit, dodgy practices can be hidden for quite some time.  But when sales dry up and banks tighten the purse strings, eventually companies are forced to admit that there is no money in the till.

That's why recessions always seem to be accompanied by revelations of terrible accounting practices, which makes a lot of people think that an epidemic of dishonest accounting must have brought the economy to its knees.  But there's not much evidence that accounting practices actually get worse at the end of booms; it's just that companies who might have gotten away with it and eventually made enough money to repair the hole in their balance sheets, instead are forced to disclose what they've done.

I supect that this is also the case with the emerging epidemic of governments who cooked the books.  Hungary is the latest culprit, and its official pronouncements are starting to sound, well, worryingly Greek:

The previous government, which pledged to narrow the budget gap to 3.8 percent of gross domestic product this year, "manipulated" figures and "lied" about the state of the economy, Szijjarto said.

A fact-finding panel appointed by Orban's government will probably present preliminary figures on the state of the economy this weekend, Szijjarto said. The government will publish an action plan within 72 hours after the committee reports its findings, he said.

"We need a clean slate to formulate our economic action plan, and the fact-finding committee will provide just that."

Thankfully, Hungary's debt-load is not as high as it was in Greece. But we can't rule out the possibility that more of these "earnings restatements" may be coming down the road, as governments run out of creative ways to fudge their figures.

This article available online at:

http://www.theatlantic.com/business/archive/2010/06/hungary-says-its-books-were-cooked/57699/