How Corporate Crooks Cook the Books

How Corporate Crooks Cook the Books

Phil Brennan, NewsMax.com
Wednesday, March 13, 2002

Editor's note: This is the second in a series. See part one, The Great Stock Market Scam.

"The single most important piece of fundamental information you need about a company is its correct earnings," Dr. Martin D. Weiss advises in The Ultimate Safe Money Guide.

"It's no coincidence, therefore, that earnings information is often the prime target for manipulation and distortion - by none other than the company officials who are responsible for compiling and issuing the data for each quarter."

Weiss says that the problem arises when company officials are pressured by Wall Street to meet the Street's "overblown expectations" fearing that if they don't, the price of their stock will be "severely punished."

"So when they realize their actual earnings are falling short, many resort to gimmicks (both legal and illegal) to twist the truth. The consequences for investors are disastrous."

He cites such cases as:

Nine West: When investigated by the Securities and Exchange Commission for allegedly misrepresenting revenues after its 1995 acquisition of U.S. Shoe Corp., its stock plunged.

Shareholders in Summit Medical saw their stock slide nearly 90 percent for similar reasons.

Stock in McKesson HBOC plunged 82 percent after it was forced to restate three years' worth of revenues because of accounting improprieties.

Sunbeam Corp. falsely reported $96 million in income it never earned. The stock was virtually wiped away - down 93.4 percent.

Tyco fell 58 percent, Informix fell 89 percent, and Safety-Kleen lost a whopping 96 percent - all because of allegations that their earnings has been distorted.

And then there was Enron and Global Crossing ....

Weiss notes that in each case, when the truth finally came out, and by the time most investors learned what had happened and sold their stock, it was too late.

These are not isolated cases. Weiss says that in a close look at more than 6,000 companies listed on U.S. stock exchanges, 1,697 - nearly one out of three - had significant discrepancies between earnings and cash flow. Such results are, he wrote, a red flag, leading to suspicions of earnings manipulations, legal or illegal.

Stock-Options Scam

Why do companies do this, he asks. "Simple. The officials of America's corporations get up to 90 percent of their compensation in stock and stock options. So they have everything to gain by putting out information that will boost the value of their own investments in the company."

What happens, therefore, when a company's stock drops by 30 percent, for example?

"The Big Cheese loses one third, one half, or even two thirds of his or her personal wealth. In the case of a big outfit that can run into the hundreds of millions of dollars."

Knowing that there is nothing better to pump up stock prices than a positive earnings report, "unscrupulous CEOs massage the numbers, hide losses any way they can, artificially inflate revenues, and when all this fails, look you straight in the eye and lie their rich, well-tailored fannies off."

And you pay the price.

Weiss lists some of the tricks corporate bigwigs use to cook the books. One is falsely inflating the goodwill value of the company. Another is padded sales reports, and another is playing games with details of stock options.

But all this is just the first filter through which the facts are laundered.

Once the information has passed through corporate headquarters and reached Wall Street, you can "add on a whole new layer of hype and distortion."

We'll cover that story next in part three.

Get a special deal on "The Ultimate Safe Money Guide: How Everyone 50 & Over Can Protect, Save and Grow Their Money."

Read more on this subject in related Hot Topics:

Enron

Global Crossing Scandal