The smell of scapegoat reached as far up the Thames as our offices in Hampton. The source of the aroma was the City, where credit-rating agencies had recently been roasted by the Commons Treasury select committee. The charge, made in a report that set out to find someone to blame for the financial downturn in general and the credit crunch in particular, was that credit agencies had inflated the ratings of many of the institutions that also happen to be their customers.
Whether there is any truth in the allegation is a matter for the regulator. But the whiff of corruption that could happily be ignored during boom times takes on a new and more urgent pungency when a whipping boy has to be found.
Blaming the credit agencies for the crisis, however, is a bit like blaming Michael Fish for the 1987 hurricane it was going to happen whether he saw it coming or not.
The one difference is that credit agencies do have some influence on the financial weather and if they get their sums wrong, wilfully or accidentally, it can be costly.
There is a confusing array of companies offering business information and
although much of it is based on the same data, what happens to that data and
what decisions are taken on the back of it can be very different.
In today’s climate it is more important than ever to know that the firms with which you do business are a good risk. Large revenues do not necessarily mean good cash flow, and healthy cash flow does not always signal profitability.
The IT industry unfortunately does not have a very good reputation when it
numbers. CA infamously recorded software licence revenues on its books before customers had even been billed.
However, the semiconductor industry has always been an honest witness in financial matters. The book-to-bill ratio, which compared orders to invoiced businesses, was considered a reliable barometer for the computer hardware industry.
Credit scores are calculated using more complex formulae than this. You do not need to understand the workings out, but you do need to believe that they work. You can never eliminate risk from business, but you should never be gambling.
Paul Westcott is product development director at ICC, a provider of business information
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