- "Immediately after business slave George W. Bush
took power, Corporate America went on a lying spree. . . . Dan Rather,
Tom Brokaw and Peter Jennings appear loath to report that such high profile
companies as Viacom, General Electric, and Disney are also engaging in
the accounting scheme. "
-
- Missing The Overall
-
- A multi-trillion dollar financial scandal is occurring
in the United States right now. It threatens to inflict unprecedented carnage
upon Corporate America and horrific damage to our national economy. The
mainstream media is aware of it, but most Americans are not, because the
corporate news outlets refuse to report on it.
-
- It is not conspiracy.
-
- It is complicity.
-
- The coverage of the Enron situation has primarily focused
on the disintegration of a powerful corporation due to the deceit and criminality
of those who ran the company. The few reporters who have looked below the
surface have proven linkage between Enronís corruption and its political
connections to the Bush administration.
-
- While the crimes of former Enron chairman Kenneth Lay
and the collusion of former Texas governor George W. Bush are significant,
the corporate media is selfishly choosing not to focus on the big story.
-
- In February of 2001, Enron stock was trading above $80
per share, which placed a market value of more than $60 billion on the
company. Today, the stock no longer trades, rendering Enron virtually worthless.
It is crucial to remember that, despite the harrowing decline in its fortunes,
the company never reported a bad earnings quarter.
-
- Enronís duplicity is an extreme symptom of a financial
cancer that threatens the health of the economy. The disease is a malignant
accounting method that has received legal protection from conservative
politicians on behalf of their corporate benefactors. It is called 'pro
forma'. Originally intended to allow companies to compensate for extraordinary
events that distorted their financial reports, the pro forma accounting
method has led to the greatest fraud ever perpetrated.
-
- Previously, publicly owned companies had been legally
required to provide shareholders with an honest accounting of their earnings.
The standard used was GAAP, Generally Accepted Accounting Principles. Under
this method, a company would state its earnings based on the old fashioned
equation of income minus expenses. Using pro forma, companies decide which
expenses are ìrelevantî, thereby providing great latitude
for creativity.
-
- (GRAPH) S&P 500 GAAP EARNINGS AS A PERCENTAGE OF
REPORTED EARNINGS Sources: Standard & Poor's, Thomson Financial/First
Call
-
- As shown above, immediately after business slave George
W. Bush took power, Corporate America went on a lying spree. Freed from
concerns about regulatory oversight, this countryís biggest companies
became dramatically more ìcreativeî with their earnings reports.
Current estimates for S&P 500 corporations are that they have collectively
earned about $410 billion in 2001 when using the pro forma accounting method.
However, when using GAAP, they have collectively earned about $240 billion.
-
- Those who claim that Enron was an exceptional case are
technically correct. While Enron overestimated its earnings by 100%, the
average large publicly held American corporation is overestimating its
earnings by only 42%.
-
- IBM reports pro forma earnings. So does Intel. And Cisco
Systems. And Dell. And Sun Micro. And Motorola. And Microsoft. And...
-
- By engaging in such manipulation, with the assent of
accountants and governmental oversight agencies, Corporate America has
conned the public into investing trillions of dollars based on phony earnings.
Cisco, for example, has used its artificially inflated stock price as capital
to acquire other companies. Many corporate empires have been built on such
accounting legerdemain, including General Electric (NBC), Viacom (CBS),
Disney (ABC), AOL/Time Warner (CNN, Time Magazine), News Corporation (Fox),
The Washington Post Company (Washington Post, Newsweek), the Tribune Corporation
(Chicago Tribune, Los Angeles Times), and the New York Times Company (New
York Times, Boston Globe).
-
- Enron is the tip of an iceberg on which sits the entire
mainstream media.
-
- A national association of accounting firms has called
on the Securities and Exchange Commission to require all publicly held
corporations to report real GAAP earnings. The return to ethical accounting
standards would mean that, in order to reflect the current valuation of
the Dow Industrials, the average would fall to 5825. In order to reach
the historical norm based on GAAP, the Dow would decline to 3300.
-
- A major decline in stock prices would erase trillions
of dollars of investors' wealth. With the uninformed public currently heavily
invested in the market, this would have a crushing impact on the finances
of the average American.
-
- In 1995, Senate Republicans and almost half of their
Democratic colleagues joined to override President Clintonís veto
of legislation providing corporations with protection from shareholder
lawsuits. The leader of the effort to dramatically reduce civil liability
for companies that report phony earnings was Wall Street lobbyist Harvey
Pitt, who has made a career of defending the shady dealings of stock market
thieves like Ivan Boesky.
-
- Just as his father hid the magnitude of the savings and
loan scandal until after the 1988 election, Bush is desperately trying
to obscure the truth about Corporate Americaís financial sleight
of hand in order to defer the tumbling of the house of cards until after
the 2004 campaign. He expects to be helped in this effort by the man he
appointed to be Chairman of the Securities and Exchange Commission, the
one who is most responsible for seeing that corporations accurately report
their earnings.
-
- Harvey Pitt.
-
- The powers that be are pulling out all the stops.
-
- What they are fighting is the law of gravity. As the
high powered executives at Enron learned, all the political machinations
in the world canít prevent a stock from falling when the word gets
out that the books have been cooked. After investors discover theyíve
been scammed, they sell, and the mightiest of companies can be crushed.
Less than a year ago, Enron was the seventh largest corporation in America.
Today, it is no longer functioning as a business entity. It is, for all
intents and purposes, dead.
-
- The greatest legacy of the Enron debacle will be increased
public pressure on companies to report their real earnings. If corporations
are forced to be honest, then there will be shocking revisions in the financial
statements of Americaís most prominent businesses.
-
- The current situation is a scandal of almost incomprehensible
magnitude, but it is not a conspiracy. For years, the disgrace of earnings
manipulation has been an open, dirty little secret. Dissidents like the
highly respected money managers at Comstock Partners (http://www.comstockfunds.com/)
and brokerage analyst Alan Newman (http://www.cross-currents.net/charts.htm)
have been screaming bloody murder about how Corporate America is cheating
the public.
-
- Their voices have not been amplified. Dan Rather, Tom
Brokaw and Peter Jennings appear loath to report that such high profile
companies as Viacom, General Electric, and Disney are also engaging in
the accounting scheme.
-
- The current reported level of corporate earnings is a
mirage. The investing public has been taken for a magic carpet ride. The
deceit of management, now so evident in the case of Enron, is endemic in
corporate boardrooms across America. It is the massive impending economic
fallout from that bitter reality which is the looming tragedy in this story.
-
- While the media continues to focus on the microcosm of
corruption at Enron, the public at large has yet to be informed of the
epidemic of the earnings lies. As Deep Throat told Bob Woodward during
the Watergate scandal, when the reporter was focusing on the criminal behavior
of Nixon functionary Donald Segretti, "You're missing the big picture.
You're missing the overall."
-
- "This thing involves everybody."
-
- Sources:
-
- Accounting For Options (item 3), Chetan J. Parikh, Capital
Ideas Online, May 31 - June 13, 1999 Issue
-
- S&P P/E 37?!?!, Carl Swenlin, AegeanCapital Inc.,
August 3, 2001
-
- Earnings Report Parodies, Comstock Partners, Inc., October
11, 2001
-
- Smoke and Mirrors, Comstock Partners, Inc., August 22,
2001
-
- How we got into this corporate mess, Dan Gillmor, TheDailyCamera.com,
December 24, 2001
-
- Spin on tech financial results comes under more scrutiny,
Scott Herhold and Mary Anne Ostrom, SiliconValley.com, January 31, 2002
-
- Disney Profit Beats Forecasts, Clouds Remain, Bob Tourtellotte,
Reuters, January 31, 2002
-
- Enron: Could your stock be next?, Paul R. La Monica,
CNNMoney, November 30, 2001î
-
- "William Fleckenstein, president of Fleckenstein
Capital, a money-management firm in Seattle that engages in short selling,
says that General Electric is a company that fits this description. Although
Fleckenstein is not shorting GE (GE: down $1.23 to $38.50, Research, Estimates),
he says that investors would be wise to stay away from the stock because
of all its moving parts -- a mish-mash of different businesses in several
countries reporting in a variety of currencies. ëIt's literally impossible
to know what's going on there," he says.
-
- "In response to this criticism, General Electric
spokesman David Frail says, ëGE is no more difficult to understand
than AOL Time Warner (the parent of CNN/Money.com) or any other multi-business
company." [So true.]
-
- Viacom beats Street, CNNMoney, October 25, 2000
-
- News Corporation Reports Double Digit Film Operating
Income Growth in First Quarter, Business Wire, November 7, 2001
-
- Notes to Consolidated Financial Statements, The Washington
Post Company, 2000 Annual Report
-
- As predicted, second-quarter results grim for newspapers,
Tara McMeekin, Newspapers & Technology, September 2001
-
- Wider loss for AOL Time Warner, Tribune News Services,
January 31, 2002
-
-
- Comment
-
- From Paul Ator
2-6-2
-
- Please share these comments with Mr. David Podvin
-
- Here is a close friend's take on your 1/31 rense.com
article after I drew it to his attention. He is a senior Senate staff aide
whom we've known over 50 years. My own views and concerns may be closer
to yours than to his, but we would both greatly appreciate your response
to those he expresses below.
-
- Paul
___
-
- The article is rather off-putting because of the name-calling
hyperbole. GAAP has not been abolished. Although I am not an accountant,
the use of "pro forma" reporting does not abolish basic accounting
or reporting principles.
-
- The name of the game in business is the same as the name
of the game in your dealings with the IRS and others. There is a clear
difference between tax avoidance (where you don't pay a nickel more than
you have to) and tax evasion (where you don't pay the nickel you are required
to pay). I suspect that what happened here is what happens in the tax
area.
-
- There is black, there is white, and there are a thousand
shades of gray. If one is overly conservative, one is a fool--and quite
possibly liable for shareholder suits if one stays employed by the corporation
that long. If one is overly aggressive, one is a fool--ditto for the above,
plus possibly going to jail.
-
- There is a rather obsessive concern in the U.S. with
showing constantly improving short-term results. A corporation is judged
by the market too often not only on whether it quarterly earning increased,
but whether they beat the "estimate". It's as if the investors
have willfully suspended normal common sense and really believe that everything
is going to get better every day in every way, when it comes to corporate
earnings. The world, I believe, does not work that way.
-
- In order to cater to this, however, a great premium is
placed on presenting balance sheets and earnings reports in the most favorable
light. When a bank establishes loan loss reserves, it has to anticipate
(and constantly re-evaluate) the collectibility of its loan portfolio.
That is affected by a number of things, including the overall state of
the economy. The bank regulators press the banks to assume the worst case
scenario (so they don't overstate earnings); the tax authorities challenge
any increase in the loan loss reserve on the grounds that the bank is trying
to under-report its income for tax purposes.
-
- Expressed more generally, corporations that are competing
for market capital (investors) want to present the most rosy picture they
can legally get away with. To do so, one must enter the gray area. If,
in fact, a liability (such as a borrowing) can be moved off the balance
sheet by properly attributing it to another entity, that will improve the
picture.
-
- My suspicion is that Enron/Andersen/V&E simply pushed
the envelope too far. Having been there, I can add that Andersen and V&E
were competing a bit, too, in terms of whose analysis of the likely outcome
were it to go to litigation taking into account the IRS's likely appraisal
of litigation risk, etc. If one says, "this will not work" too
often, the client, it is feared, will go somewhere else to find someone
who is willing to sign a document that says "this will probably work",
so everyone is working the edge of the penumbra.
-
- I think the characterisation of Bush as a "business-slave"
is shabby and not particularly analytical. All our Presidents are, to
one degree or another, "business slaves" because if the economy
goes to hell in a handbasket (and it is business that drives the economy)
they, and the country with them, accompany the handbasket.
-
- I find the Enron debacle sad and tedious. If even half
of the allegations prove true, there were violations of law that are fully
prosecutable under existing law. The spectacle of law makers each trying
to be more "outraged" than the other is just pitiful. If either
party can pin responsibility for this on the other side it will represent
yet another triumph of marketing over substance.
-
- It rather intrigues me that so many people get so much
press coverage for attacking the big bad corporations. As a business organization,
the corporate form is neither good nor bad, except in terms of the extent
to which it accomplishes the purposes of chosing that organizational form
over proprietorship, partnership, joint venture, etc. It really does rather
smack of rallying the troops against the fearful (but nonexistant) bogeyman.
-
- As to the charge, in the article, that GE's books are
complicated, one can only respond that it is a complicated enterprise,
like most other large, multinational corporations, and that complexity
is dictated, for the greater part, by the complex web of laws of various
jurisdictions with which it must comply. Furthermore, if, in the course
of complying with those laws, GE's accountants and lawyers are able to
find a way to improve its earnings in a way that increases its market value
(so the stock goes up) or its dividends, I am personally delighted as a
small investor in the company.
-
- I do not believe that a return to some atavistic Walden
Two/Looking Backward utopian societal organization would be better for
the human race or me personally. Take a hard look at the international
news (I watched a sequence on Antenne 2 tonight in which a thief's hand
was amputated under Islamic law in Nigeria and a segment on DeutscheWelle
concerning the continuing tribulations in Macedonia) and I don't think
either of those places, seemingly devoid of the tribulations of having
to cope with multinational corporate accounting problems, is a civilization
in which I would want to live or to have my grandchildren grow up.
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