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MISSING THE OVERALL
By David Podvin
(Sources are listed below the article.)
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 Enron’s 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
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.
Enron’s 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 “relevant”, thereby providing great latitude for
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 country’s biggest
companies became dramatically more “creative” 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
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 Clinton’s 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 America’s 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
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 can’t prevent a stock from falling when the word
gets out that the books have been cooked. After investors discover they’ve
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
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 America’s 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
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
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.”
For Options (item
3), Chetan J. Parikh, Capital Ideas Online, May
31 - June 13, 1999 Issue
P/E 37?!?!, Carl Swenlin,
AegeanCapital Inc., August 3, 2001
Comstock Partners, Inc., October 11, 2001
Comstock Partners, Inc., August 22, 2001
we got into this corporate mess,
Dan Gillmor, TheDailyCamera.com, December
on tech financial results comes under more scrutiny,
Scott Herhold and Mary Anne Ostrom, SiliconValley.com, January 31, 2002
Profit Beats Forecasts, Clouds Remain,
Bob Tourtellotte, Reuters, January 31, 2002
Could your stock be next?,
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
down $1.23 to $38.50, Research,
, 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. ‘It's literally impossible to know
what's going on there,’ he says.
”In response to this criticism, General Electric spokesman David Frail says, ‘GE is no more difficult to understand than AOL Time Warner (the parent of CNN/Money.com) or any other multi-business company.’” [So true.]
CNNMoney, October 25, 2000
Corporation Reports Double Digit Film Operating Income Growth in First Quarter,
Business Wire, November 7, 2001
to Consolidated Financial Statements,
The Washington Post Company, 2000 Annual Report
predicted, second-quarter results grim for newspapers,
Newspapers & Technology, September 2001
loss for AOL Time Warner,
Tribune News Services, January
Podvin on the Media
Podvin, the Series