Commentary: Paying for the Sins of Enron
By Nanette Byrnes
If there was any question that accounting malfeasance is at the top of the national agenda, it was settled on Jan. 29. That's when President George W. Bush strayed from the usual litany of Medicare-funding and defense-budget demands to appeal for accounting reform. That's right, accounting reform. Questions about the quality of audited numbers have grown so pervasive so quickly that they now merit prominent placement in the State of the Union address.
It's a remarkable about-face from the not-so-distant carefree days of Henry Blodget, momentum investing, and the impassioned defense of pro-forma earnings calculated at management whim. In those heady times, investors were willing to believe even the most farfetched valuations.
Then came Enron Corp. (ENE ) The collapse of the New Economy highflier ended the blind optimism that had peaked with the dot-com craze. Today, there's a new sobriety on Wall Street--and a new era in which earnings and valuations will be lower and momentum may lead to reform. Today's hot stock? Not tech giant Cisco Systems Inc. (CSCO ), which at 19 a share is less than half its 52-week high, but steelmaker Nucor Corp. (NUE ), which is topping its charts at 57 a share.
In a 180-degree turn, Wall Street has become as harsh a judge as it was once lenient. As Enron imploded, investors realized they had never really understood how the company made its money. Since then, they have been exacting swift vengeance, hammering any company bearing the slightest whiff of financial chicanery. "It's the reverse of the old bank crisis," says Patrick S. McGurn, vice-president of Institutional Shareholder Services. "It's not a run on the bank. It's a run out of stocks."
And it's not just the outliers that are suffering. Blue chips are also getting a shellacking for practices that a year ago would have been greeted with yawns. Among the companies that have succumbed to Enronitis: Tyco (TYC ), Cendant (CD ), AOL Time Warner (AOL ), even Disney (DIS ).
Pipeline owner Williams Cos. (WMB ) fell 22% Jan. 29 after announcing a delay of its fourth-quarter earnings pending the review of $2.4 billion related to an April spin-off. PNC Financial Services Group Inc. (PNC ) shares fell 9% the same day after divulging that federal regulators sought changes in its accounting for off-balance sheet vehicles. Cendant Corp. dropped 10% on Jan. 29 on rumors that a newspaper article critical of its accounting was in the works. "This is the biggest crisis investors have had since 1929," says watchdog Howard M. Schilit, who is seeing new demand for the research done by his Center for Financial Research & Analysis. "Investors don't know who they can trust."
Among the hardest hit are the conglomerates, once beloved by Wall Street for their fast and steady growth. Just this year, some $50 billion of Tyco International Ltd.'s market value has evaporated after investors panicked over the company's less-than-crystal-clear financials. Even the master conglomerateur, General Electric Co. (GE ), has not been able to avoid a stock decline this week. While investors love GE's steady results, they're getting cold feet over its opaque financials. "People have become fearful of complex accounting," says Matt Greenberg of Iridian Asset Management LLC, a Tyco shareholder.
That has led to a new sport on Wall Street: ferreting out the next Enron. McGurn of ISS notes that Wall Street analysts looking to make a name for themselves are now hunting for the next big blowup, not the next hot stock. Robert Uek, a portfolio manger at John Hancock Funds and a former certified public accountant, says he and his staff are combing through the financials of every stock they own. And led by big union funds, investors are planning 36 proxy initiatives at companies such as Walt Disney Co. proposing that auditors be barred from consulting.
When will it all end? Probably no time soon. TIAA CREF retirement fund Chairman John H. Biggs says that investors should expect far lower earnings this year as internal and external auditors scrub down the numbers. "Confidence has been shaken," says Gerald I. White of institutional investor Grace & White Inc. "And it's a lot bigger than Andersen and Enron."
Byrnes, who was assisted by bureau reports, covers accounting from New York.