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Investor caution will do better than new government regulations, laws | |||
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By DAVID MOON, Moon Capital
Management This past week, I read about an action that, if implemented, would be the most effective tool in preventing future 'Enron situations.' The action was not a government proposal, nor was it a new regulatory authority. It did not involve more stringent accounting standards or disclosure requirements. It was not the result of a consultant's study or Senate hearings. It was, in fact, a very selfish decision made by one company that could benefit the entire US market place. Delta Airlines is considering replacing Arthur Andersen as its auditor. When you go to a web site and look at a company's earnings, how do you know the number reported on the web site is accurate? The INDEPENDENT auditors confirm that the reported annual earnings figures conform with generally accepted accounting principles. That's why we can trust the numbers ' a big accounting firm with lots of really smart people have reviewed the company's books and tell us the numbers are okay. When an auditor loses the complete trust of the investment community, the audit is compromised. It may, in fact, be worthless. Investors are going to start noticing auditors. It used to be that an audit by one of the five biggest accounting firms was considered as good as gold. Not any longer. Accounting firms are going to have to take their auditing role more seriously and be truly independent. We do not need a federal law to prohibit accounting firms from doing consulting work and performing a company's audit; the company should just have to clearly disclose it. Investors can then view the audited financial statements with the appropriate amount of skepticism. Part of the cause of the Enron collapse is irresponsible greed. Not just the greed of a company executive who pushes the envelope so often that he loses sight of the edge of the table. Not just the irresponsible greed of an auditor who, either wittingly of unwittingly, serves as accomplice. Part of the problem is irresponsible investor greed. It is a terrible shame that many Enron employees had retirement plan money invested in Enron stock and had no ability to divest themselves of it. (This is a classic issue about property rights; who owns the retirement plan assets, the employee or the employer?) But there were also millions of investors, including willing Enron employees, who asked very few questions and showed little skepticism when Enron stock increased from $36 to $90 in ten months. Many of these people were getting rich (or so they thought) on a company whose business they could not explain ' or even understand. To be sure, the company's financial statements were misleading and incomplete. But the much-discussed fact that Enron executives were selling hundreds of millions of dollars in stock prior to the price collapse was public knowledge. Anyone with access to a computer mouse could have easily known that the top Enron executives were not buying the stock in 2001; they were selling it. When irresponsibly greedy investors are making money, they don't ask questions. They don't look at the warts. Imagine if the front page of a company's annual report included the following disclosure: 'These financial statements were reviewed by an accounting firm who was also paid a lot of money to help develop our business strategies. The company owes a ton of money that doesn't show up on these financial statements. The top management of the company is selling a lot of stock, even while you read this.' As long as the stock price was going up, there are plenty of investors who would ignore this sort of warning. Hear no evil, see no evil. There are twelve senate and house committees and sub committees that have announced Enron investigations. Approximately 250 senators and congressmen serve on those twelve committees; more than 200 of them have received campaign contributions from Enron or Arthur Andersen. These hearings may provide plenty of bombshells, but do not expect them to be fair and unbiased. The Enron situation is a perfect example of almost everything going wrong. No law can prevent that. David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).
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