If you haven’t been following the scandal over the LIBOR rate, you definitely should tune in. It can serve as an example for printing executives, and a method to assure you’re not “cooking your own books.”
Ok, now don’t get offended by the tone of that statement. I’m not insinuating you’re engaging in any type of criminal activity. However, you may not be approaching your financials with the kind of accuracy needed to make an honest assessment of your business.
The folks in charge of the LIBOR scandal were too concerned about accuracy. If you’re not aware, the LIBOR (London Inter-bank Offered Rate) is a critical benchmarking number used in the global financial system. It’s managed by a big group of banks to estimate what it would cost them to borrow money today.
In a nutshell, it turns out this critical benchmark was manipulated by the banks for their own profits (if you can believe it). In an article that appeared in The New Yorker, one thought really hit home for me:
“Rigging LIBOR was shockingly easy. The estimates aren’t audited. They’re not compared with market prices. And LIBOR is put together by a trade group, without any real supervision from government regulators.”
Eventually, this system came back to bite the banks, primarily because they couldn’t grasp that self-regulation meant they had to be honest to themselves and their customers.
How You Can Avoid the LIBOR Pitfall
You, as a business owner, are self-regulated. Like the LIBOR folks, you can rig your own finances with shocking ease. But eventually, as the mighty bankers have realized, a lack of integrity spells doom.
How can you avoid a similar fate? Here are three suggestions:
- Audit your financial reports, don’t just compile numbers. Are they accurate? Are they honest?
- Benchmark your results with what your industry is doing. If you’re slipping compared to your competitors, that’s an indicator the market is passing you by and you need to make some internal changes.
- Find a third party (not necessarily the government) that can impartially help you evaluate your financial metrics. Keep your accounting team, but get them some oversight to help make accurate assessments.
What happened to the LIBOR rate was shameful, but I won’t bother lecturing on the sad state of some of these powerful financial institutions. I’m more focused on your institution – and you should be too.
Photo by: mskogly
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