Accou nting and
Engineering Economy
The Two Faces of ABB
In the late 1990s,ABB Ltd was flyinghigh. The European conglomerate was an engineering
giant with a global network of operations and forward-looking management.
Unlike many of its competitors, ABB was also committed to mod-
ernizing its accounting system. ABB had previously followed the tradi-
tional practice of assigning overhead costs to its divisions on a roughly
equal basis. But this practice tended to obscure the fact that some acti-
vities incurred far more costs than others.
So the company spent substantial time and resources switching over
to an activity-based costing (ABC) system, which assigns costs to the
activities that actually produce them. The results were quite positive,
allowingABB to zero in on areas where it could cut costs most effectively.
But in other respects, ABB's accounting practices were less than
proactive.
One of its most serious problems arose at CombustionEngineering,
an.American subsidiary that was exposed to numerous asbestos liability
claims. For years, ABB had downplayed the extent of this potential
liability, despite warnings from outside analysts. Finally, in late 2002,
ABB admitted that its asbestos liability exceeded the subsidiary's total
asset value.
But there was more bad news still. The company also issued a very
poor third-quarter earnings report, after earlier assuring investors that
ABB was on target to improve its earnings and decrease its debt. When
incredulous investors asked how this could have happened, ABB man-
agement blamed "poor internal reporting."
By this point, ABB's stock price had nose-dived, and credit rating
agencies viewed the company's bonds as little better than junk.
Today, ABB is struggling to survive. It has sent Combustion Engineering into bank-ruptcy in an attempt to limit asbestos claims, and has sold off other subsidiaries. It has also
slashed thousands of jobs and embarked on a wide array of cost-cutting projects.
ABB now claims to have put the worst behind it. Investors must certainly be hoping
this is true.
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