Companies now fear 'Enronitis' epidemic
By Alan Clendenning
The Associated Press
Saturday, February 16, 2002 - 12:00 a.m. Pacific
NEW YORK — The big Enron headlines this past week came from Washington, D.C., where former Chairman Kenneth Lay invoked his Fifth Amendment right against self-incrimination and company executive Sherron Watkins testified about telling Lay last summer that the energy-trading company was on the verge of collapsing.
But across the country, publicly traded companies ranging from those that make doughnuts or electronic circuits to those that provide telephone service were struggling to counter perceptions that they have Enronlike problems.
And experts think the stream of disclosures some are calling "Enronitis" will continue for some time, possibly reaching a peak next month, when companies start issuing their annual reports.
In Winston-Salem, N.C., Krispy Kreme said it would change its method of financing construction for an Illinois dough-mixing plant, responding to a Forbes magazine article that described a synthetic lease for the plant as an "off-balance-sheet trick."
In Denver, Qwest announced it would hold a weekly conference call for investors to rebut "rumors and innuendo" about the company after it acknowledged it had been shut out of the corporate bond market amid worries about its accounting practices.
And in Exeter, N.H., Tyco executives — who first came up with the idea of the weekly conference-call update — gave investors an update about the conglomerate's plans to break itself apart. Making good on a promise to be candid about its accounting practices, the company also disclosed more details about $3 billion in acquisitions last year.
The public-relations moves are having mixed results. While Krispy Kreme's stock recovered this past week, shares of Tyco and Qwest dropped. The problem, experts said, is likely to continue for companies that have balance sheets that are difficult for analysts and investors to understand.
And it happened to IBM yesterday, after it said it used income from the sale of a business unit to lower its operating costs, giving its fourth-quarter 2001 earnings report a rosier glow than it might otherwise have warranted. It's stock fell $5 to $102.89.
The accounting move boosted the company's operating income, which, IBM reported, narrowly beat Wall Street analysts' expectations. At other companies, such sales are often reported as a one-time gain that wouldn't be reflected in operating income.
IBM defended its accounting of the $300 million sale, reported in yesterday's editions of The New York Times, saying the company buys and sells businesses as a normal practice.
"These companies are being painted dramatically and perhaps some unfairly with the Enron brush," said Richard Cripps, chief market strategist for Legg Mason in Baltimore. "But that's the risk of business, and that's why you run a sound balance sheet with honest numbers."
More disclosures that hurt company stock are likely in the weeks to come, but "if it were a ball game, I would say we're about in the seventh inning," said Richard Dickson, a technical analyst at Hilliard Lyons in Louisville, Ky.
"With Enron, I think you had extreme examples of everything," Dickson said. "Do other companies do this kind of stuff? Yeah. Do they do it to the extent Enron did? No."
Some companies can use annual reports, which many now are preparing for shareholders, to reveal how they do business. This year, the reports are expected to be much fatter and filled with dry footnotes about accounting practices.
Chief executives "are going to their auditors and saying, 'I don't care what we were doing before, but we have to be fully disclosed,' " Cripps said. "If not, they'll get punished."
One good way to measure the impact of Enron on corporate disclosure would be to do a study comparing the weight of this year's annual reports to the weight in years past, said Lawrence White, an economics professor at New York University's Stern School of Business.
"The smart companies are disclosing because they know if there's some smelly stuff, it's better to get it out quickly and get it all out," he said. "Enronitis probably continues through another month or two, we need to get thorough annual report season."
Wall Street ended the week mostly higher with only the Nasdaq finishing lower.
For the week, the Dow rose 158.80, or 1.6 percent, to 9,903.04, despite losing 98.95 yesterday.
Boeing, one of the 30 Dow stocks, advanced 13 cents to end the week at $44.90, up $3.20 or 7.7 percent, for the week. Microsoft, also a Dow stock, slid $1.45 to $60.23, giving up 42 cents for the week
The Nasdaq registered a weekly loss of 13.68 after falling 38.17 to 1,805.20 yesterday.
The S&P 500 advanced 7.96 for the week, closing at 1,104.18 despite a loss of 12.30 yesterday.
Gold/oil
In U.S. trading yesterday, gold fell $1.30 to $298.90 per ounce, down $5.50 for the week. Oil added 27 cents to $21.36 per barrel, up $1.24 for the week. |
