It ain't just Enron
January 31, 2002 7:12 AM Subscribe
It ain't just Enron -- This kind of pro forma reporting of "profits" is shifty, misleading, and common practice. Should us small investors be worried? Or do I need to be an accountant to know why this isn't a bad thing? And does this mean that there more Enrons out there, ready to implode in a pile of worthless paper?
Keep your money in offshore banks! that is what the drugkings do; that is what the terrorists do; that is what the big banks do in this country to help their big clients...and that is why our govt is unwilling to close down these offshore banks that have made a few island suddenly so wealthy. or try Switzerland. Or, as last resort, keep your money under your mattress. Acounting can be "aggressive"--ie, creative and doing the work of the compnay, or real, ie, the sort of thing the IRS looks for if you are a very small person with conventional deductions...why do so many large corporations pay no taxes whatsoever? and you do, no?
posted by Postroad at 7:46 AM on January 31, 2002
posted by Postroad at 7:46 AM on January 31, 2002
But if I can't trust the company's financial reports, and I can't trust the accounting firm that certified the financial reports, and I can't trust the cheerful e-mails sent by the company's chairman encouraging us to buy buy buy while behind our backs he's frantically trying to sell sell sell....see the problem?
"as long as you believe it is ok it will be". This is the Tinkerbell theory of investing, right? And what is it I need...belief, or knowledge? Very different things.
And "social responsibility" is not an indicator of accounting acumen or honesty. I mean, it's good to invest in something besides cigarette manufacturers and toxic waste haulers, but it seems to me Ben & Jerry's is as apt to cook the books as anyone else.
posted by BitterOldPunk at 8:02 AM on January 31, 2002
"as long as you believe it is ok it will be". This is the Tinkerbell theory of investing, right? And what is it I need...belief, or knowledge? Very different things.
And "social responsibility" is not an indicator of accounting acumen or honesty. I mean, it's good to invest in something besides cigarette manufacturers and toxic waste haulers, but it seems to me Ben & Jerry's is as apt to cook the books as anyone else.
posted by BitterOldPunk at 8:02 AM on January 31, 2002
" ... But if I can't trust the company's financial reports, and I can't trust the accounting firm that certified the financial reports, and I can't trust the cheerful e-mails sent by the company's chairman encouraging us to buy buy buy while behind our backs he's frantically trying to sell sell sell....see the problem? ..."
The "pro forma" reporting tactics are relatively new (they gained great popularity during the internet boom, when start-ups that had huge burn rates started trying to find ways to appear slightly better on paper). However, It's never been wise to rely solely on either a company or it's accounting firm for a complete picture of the company. Most big investment houses - the Merrills and Morgans of the world, and even the online giants - the Fidelitys, Datek's and Schwabs - have fairly sophisticated research services. Even in this case, however, it's not good to rely only on one analyst.
Reading the company's information, the data and opinions from several analysts - and even further, reading the SEC filings the company is required to make (which are available online) ... as well as other sources, is always a good idea. Always has been.
While the pro forma reporting mechanisms are not exactly pleasing, the trend really isn't a big deal ... because no one ever should have simply taken something like the quarterly reports mailed from companies to shareholders as the sole source of information for investment decisions.
" ... the whole economy is built on faith, so as long as you believe it is ok it will be. the whole thing could implode in a pile of worthless paper..."
No - the equities and fixed income markets are based to some degree on faith, but the economy itself is built on people producing and people consuming. The economy can't collapse into a pile of worthless paper ... because the paper is only a way of representing value ... it is not the value itself. A currency can collapse, but all that means is that it is no longer useful as a store of value, or a medium of exchange ... but people need (for instance) to eat, and need clothes to wear. A person that farms produces food, and a person that tailors produces clothes. Without any currency at all these people will still produce and consume one another's goods ... currency just makes it easier to do so.
posted by MidasMulligan at 9:12 AM on January 31, 2002
The "pro forma" reporting tactics are relatively new (they gained great popularity during the internet boom, when start-ups that had huge burn rates started trying to find ways to appear slightly better on paper). However, It's never been wise to rely solely on either a company or it's accounting firm for a complete picture of the company. Most big investment houses - the Merrills and Morgans of the world, and even the online giants - the Fidelitys, Datek's and Schwabs - have fairly sophisticated research services. Even in this case, however, it's not good to rely only on one analyst.
Reading the company's information, the data and opinions from several analysts - and even further, reading the SEC filings the company is required to make (which are available online) ... as well as other sources, is always a good idea. Always has been.
While the pro forma reporting mechanisms are not exactly pleasing, the trend really isn't a big deal ... because no one ever should have simply taken something like the quarterly reports mailed from companies to shareholders as the sole source of information for investment decisions.
" ... the whole economy is built on faith, so as long as you believe it is ok it will be. the whole thing could implode in a pile of worthless paper..."
No - the equities and fixed income markets are based to some degree on faith, but the economy itself is built on people producing and people consuming. The economy can't collapse into a pile of worthless paper ... because the paper is only a way of representing value ... it is not the value itself. A currency can collapse, but all that means is that it is no longer useful as a store of value, or a medium of exchange ... but people need (for instance) to eat, and need clothes to wear. A person that farms produces food, and a person that tailors produces clothes. Without any currency at all these people will still produce and consume one another's goods ... currency just makes it easier to do so.
posted by MidasMulligan at 9:12 AM on January 31, 2002
Granted, the economy is not built on faith, but all of Wall Street is built upon investment predicated upon duly diligelent analysis.
Analysists ain't what they once were and thats old news. But if one can't believe the financial statements released by publicly owned companies, then investment in those companies can't possibly pass any sort of due dilligence.
Its all very ominous. Note already that certain companies that have publicly gone the extra mile in explaining their complex financials are rising, while those that can't are falling like rocks.
That leaves only one question: how widespread is Enron-Style (extra crispy) accounting among publicly owned companies? If it is widespread, it will likely cause a crash, or at the least a steep slide, that will have global consequences since so much of the world's capital is invested in US markets. (And that presumes that extra crispy accounting isn't also taking place in foreign markets as well).
It all makes the S&L scandals of the 1980s pale by comparison, no?
posted by BentPenguin at 9:32 AM on January 31, 2002
Analysists ain't what they once were and thats old news. But if one can't believe the financial statements released by publicly owned companies, then investment in those companies can't possibly pass any sort of due dilligence.
Its all very ominous. Note already that certain companies that have publicly gone the extra mile in explaining their complex financials are rising, while those that can't are falling like rocks.
That leaves only one question: how widespread is Enron-Style (extra crispy) accounting among publicly owned companies? If it is widespread, it will likely cause a crash, or at the least a steep slide, that will have global consequences since so much of the world's capital is invested in US markets. (And that presumes that extra crispy accounting isn't also taking place in foreign markets as well).
It all makes the S&L scandals of the 1980s pale by comparison, no?
posted by BentPenguin at 9:32 AM on January 31, 2002
Hey Midas--thanks for the good comment! Especially thanks for not calling me out for participating in the same kind of heartless capitalism I've bewailed in some of my more pinko posts.
(MeFi'ers please note: a civil dialogue is now taking place in this very thread between my esteemed conservative colleague Midas and myself, a wacko liberal. And the ground is still pretty warm.)
posted by BitterOldPunk at 9:37 AM on January 31, 2002
(MeFi'ers please note: a civil dialogue is now taking place in this very thread between my esteemed conservative colleague Midas and myself, a wacko liberal. And the ground is still pretty warm.)
posted by BitterOldPunk at 9:37 AM on January 31, 2002
But if one can't believe the financial statements released by publicly owned companies, then investment in those companies can't possibly pass any sort of due dilligence.
In most cases, the statements aren't inaccurate. The problem is that most people aren't equipped to read them. Those with a cursory knowledge of security analysis may be able to calculate liquidity ratios off the balance sheet but may not know enough about accounting and GAAP standards to understand that line items may be accounted for in different ways, all of which are acceptable under current reporting requirements. You can't just look at the numbers. You need to have a thorough understanding of how the company *got* to those numbers. If the numbers aren't sufficiently explained in the filings, call the I.R. department and ask questions.
posted by lizs at 9:43 AM on January 31, 2002
In most cases, the statements aren't inaccurate. The problem is that most people aren't equipped to read them. Those with a cursory knowledge of security analysis may be able to calculate liquidity ratios off the balance sheet but may not know enough about accounting and GAAP standards to understand that line items may be accounted for in different ways, all of which are acceptable under current reporting requirements. You can't just look at the numbers. You need to have a thorough understanding of how the company *got* to those numbers. If the numbers aren't sufficiently explained in the filings, call the I.R. department and ask questions.
posted by lizs at 9:43 AM on January 31, 2002
Regardless of law, regardless of how smart investors should be, any company that enronizes its books in order to present good numbers to shareholders is knowingly deceiving. It is bad faith, even if it is legal.
The corporations who've been doing this are treating their shareholder market as if it were a consumer market: quarterly reports are really advertisements. Again, not illegal, just bad faith.
I think there will be a shakeout. And this will cause a big, big fall in the market. And it would be a good thing. Move into solid stocks (that is, stocks that have good p/e ratios based on real, not pro-forma earnings). Prepare to short on stocks that are overinflated. Do some sophisticated analysis to look for big gaps between pro-forma and real earnings to pick your shorting targets. The best way to correct this is to effectively punish the companies who have participated in the practice - and to use the market -- not government regulations and sanctions -- to do so.
posted by yesster at 9:58 AM on January 31, 2002
The corporations who've been doing this are treating their shareholder market as if it were a consumer market: quarterly reports are really advertisements. Again, not illegal, just bad faith.
I think there will be a shakeout. And this will cause a big, big fall in the market. And it would be a good thing. Move into solid stocks (that is, stocks that have good p/e ratios based on real, not pro-forma earnings). Prepare to short on stocks that are overinflated. Do some sophisticated analysis to look for big gaps between pro-forma and real earnings to pick your shorting targets. The best way to correct this is to effectively punish the companies who have participated in the practice - and to use the market -- not government regulations and sanctions -- to do so.
posted by yesster at 9:58 AM on January 31, 2002
The thing is, this happened because it was a good way to inflate the stock price. But that's no longer true -- just the opposite, in fact: Companies with similarly indecipherable financial accounting are losing market value in a big way right now.
So long as that remains the case, this will correct itself, somewhat. Companies with transparent finances will have higher stock prices, and so any company that is actually on solid ground will do everything it can to demonstrate so.
So the thing to do is just to invest in those companies whose finances you understand. Which, of course, has always been the best thing to do, anyway.
posted by mattpfeff at 10:14 AM on January 31, 2002
So long as that remains the case, this will correct itself, somewhat. Companies with transparent finances will have higher stock prices, and so any company that is actually on solid ground will do everything it can to demonstrate so.
So the thing to do is just to invest in those companies whose finances you understand. Which, of course, has always been the best thing to do, anyway.
posted by mattpfeff at 10:14 AM on January 31, 2002
'And "social responsibility" is not an indicator of accounting acumen or honesty. I mean, it's good to invest in something besides cigarette manufacturers and toxic waste haulers, but it seems to me Ben & Jerry's is as apt to cook the books as anyone else.'
it is an indicator of a company wanting to do the right thing, and although not a guarantee of good accounting practice, is an indicator. these are firms which are attempting to create a relationship with the rest of the market and the customer that reflects their values. if willfully inaccurate accounting were discovered they would loose much more respect from their investors than companies who spend money attempting to exploit legal loop-holes and don't apologise for it.
NB Ben and Jerry's is owned by Unilever (who use animal experiments in developing new cleaning products).
MidasMulligan - as we approach a world with less currency diversity does not the faith in the currency become ever more important? The collapse of any major currency effects all the rest, surely?
posted by asok at 10:54 AM on January 31, 2002
it is an indicator of a company wanting to do the right thing, and although not a guarantee of good accounting practice, is an indicator. these are firms which are attempting to create a relationship with the rest of the market and the customer that reflects their values. if willfully inaccurate accounting were discovered they would loose much more respect from their investors than companies who spend money attempting to exploit legal loop-holes and don't apologise for it.
NB Ben and Jerry's is owned by Unilever (who use animal experiments in developing new cleaning products).
MidasMulligan - as we approach a world with less currency diversity does not the faith in the currency become ever more important? The collapse of any major currency effects all the rest, surely?
posted by asok at 10:54 AM on January 31, 2002
In the 80's, Britain suffered a series of accounting scandals, the consequence of which led to much tougher regulation and more rigorous accounting standards. It is interesting to note that Andersen's particular treatment of Enron's off-balance sheet liabilities would never have been allowed under international accounting standards.
The collapse of Enron is nasty. Nastier, though, must be the exposure of the total failure of the American system of peer review and self regulation between the auditing firms. To address BoP's question - implosions on that scale are unlikely, but your country's almost certain move to finally adopt international auditing standards should help alleviate any worry you currently (and reasonably) feel. Heck, I may even start buying American stocks now.
posted by RichLyon at 12:00 PM on January 31, 2002
The collapse of Enron is nasty. Nastier, though, must be the exposure of the total failure of the American system of peer review and self regulation between the auditing firms. To address BoP's question - implosions on that scale are unlikely, but your country's almost certain move to finally adopt international auditing standards should help alleviate any worry you currently (and reasonably) feel. Heck, I may even start buying American stocks now.
posted by RichLyon at 12:00 PM on January 31, 2002
Several thoughts on a thread that has generated several good comments.
First, if you want to get into accurate accounting you must remember that the top line (revenue) does not lie. Sure, Cendant got into trouble making up orders, but if the money never arrived then it isn't revenue. Lots of numbers effect profit at the end of the day, but you can't even have profit without revenue.
Second, as the sticky note on Jim Cramer's monitor says, "Accounting Irregularities == Sell." It doesn't get simpler.
Third, when a company declares bankruptcy it's common stock is 99.99% certain to go to 0. DO NOT think you can score easy money in Enron or KMart or Global Crossing right now. Yes the company may emerge from bankruptcy, but the common stockholder is so far down the food chain of creditors that common stock will almost always get "crammed down".
Finally, learn about how "Stop Orders" work and use them. That's short for "stop loss orders" (or preserve profit orders if you are above water). A stop will not keep you from losing money, but it will keep you from losing more money than you should.
If this is all too complicated for you, consider a nice Fidelity fund and let Peter Lynch worry about it.
posted by ilsa at 2:06 PM on January 31, 2002
First, if you want to get into accurate accounting you must remember that the top line (revenue) does not lie. Sure, Cendant got into trouble making up orders, but if the money never arrived then it isn't revenue. Lots of numbers effect profit at the end of the day, but you can't even have profit without revenue.
Second, as the sticky note on Jim Cramer's monitor says, "Accounting Irregularities == Sell." It doesn't get simpler.
Third, when a company declares bankruptcy it's common stock is 99.99% certain to go to 0. DO NOT think you can score easy money in Enron or KMart or Global Crossing right now. Yes the company may emerge from bankruptcy, but the common stockholder is so far down the food chain of creditors that common stock will almost always get "crammed down".
Finally, learn about how "Stop Orders" work and use them. That's short for "stop loss orders" (or preserve profit orders if you are above water). A stop will not keep you from losing money, but it will keep you from losing more money than you should.
If this is all too complicated for you, consider a nice Fidelity fund and let Peter Lynch worry about it.
posted by ilsa at 2:06 PM on January 31, 2002
In the 80's, Britain suffered a series of accounting scandals, the consequence of which led to much tougher regulation and more rigorous accounting standards
Update "80s" and "Britain" to "2000s" and "US", and I think this statement is still valid.
As a "Big Five" person -- not with Anderson, and I'm a techie not a CPA -- I can tell you that we've had a LOT of e-mails about Enron/Anderson lately. Not having much familiarity with the financial side of things, I can only speculate what the fallout will be, but maybe the best thing that could happen is that the audit guys will start asking all those tough questions again, which maybe they've gotten away from the last few years.
posted by PeteyStock at 2:23 PM on January 31, 2002
Update "80s" and "Britain" to "2000s" and "US", and I think this statement is still valid.
As a "Big Five" person -- not with Anderson, and I'm a techie not a CPA -- I can tell you that we've had a LOT of e-mails about Enron/Anderson lately. Not having much familiarity with the financial side of things, I can only speculate what the fallout will be, but maybe the best thing that could happen is that the audit guys will start asking all those tough questions again, which maybe they've gotten away from the last few years.
posted by PeteyStock at 2:23 PM on January 31, 2002
and another thing...
i don't buy this idea that the economy is based on the trading of 'real' goods (such as food and clothes) via currency and therefore cannot collapse. how much of the currency trading in any 'developed' country is involved in essentials? and how much in pie-in-the-sky 'confidence' lead share dealing?
posted by asok at 9:48 AM on February 1, 2002
i don't buy this idea that the economy is based on the trading of 'real' goods (such as food and clothes) via currency and therefore cannot collapse. how much of the currency trading in any 'developed' country is involved in essentials? and how much in pie-in-the-sky 'confidence' lead share dealing?
posted by asok at 9:48 AM on February 1, 2002
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anyhoo, it is up to the small (or any) investor to keep tabs on the accounting practices of the company(ies) in which they invest. investing in companies which have a good record of corporate responsibility would be advisable.
posted by asok at 7:28 AM on January 31, 2002