Can't say, don't pay - questions investors should ask
Jill Treanor
Wednesday March 6, 2002
The Guardian
Signs of economic recovery may be helping to bolster
confidence in stock markets, but the mood remains fragile.
Financiers and investors alike know that many of the concerns
raised by the collapse of Enron still hold worryingly true.
For a start, nothing has been done to address the fact that so
many big companies are still saddled with huge debts. Market
participants on both side of the Atlantic are wising up in the
post-Enron world, investigating areas of corporate accounting
which should have been looked at years ago.
This has prompted Barclays Capital, the investment banking
arm of Barclays, to come up with tips for investors concerned
about unclear accounting practices, which could also be used
by companies trying to calm investor jitters.
Designed with an eye to debt-laden and acquisition-hungry
telecoms companies - where many of the post-Enron jitters have
surfaced - the main points could transfer to any other sector.
"At its simplest, you need to ask if you understand what a
company does and do you understand how it makes it's
money," said Laura Winchester, a telecoms analyst at Barclays
Capital.
She is at pains to avoid suggestions that the practices she
outlines at companies such as France Télécom, Telecom Italia
and Ericsson are dubious. But she points out that they have had
an impact on the companies involved.
She describes four broad forms of so-called financial
engineering: things you can not see; things you can see but are
not necessarily measured; things you can see but can be
forgotten; and things that are visible on the balance sheet but
open to interpretation.
"The numbers are just part of the story. The balance sheet is
just a snap shot. It captures some of the picture but not all of it
so that's why the notes to the accounts are important."
She admits: "If there is misrepresentation or poor disclosure, as
in the case of Enron, no one will know until it's too late.
"So the biggest question here is to ask how much confidence
you have in management."
The things you can see but are not necessarily measured are
often found in notes to the accounts but left out of headline debt
figures. Among events to watch for is France Télécom's
well-known obliga tion to support MobilCom and its far-from-clear
exposure as a result.
Another warning from Ms Winchester is that accounting
practices may be clear but investors' memories fail. She cites
Ericsson's earnings from its handset joint venture with Sony.
Only half of the losses from the alliance will be reported in the
operating line. She asks whether investors will remember in
coming months that the boost to Ericsson's numbers related to
this transaction.
Judgments used by companies in their accounting policies
make up her fourth point. In telecoms, there is the question of
whether revenues from deals should be booked as a one-off or
during the lifetime of a deal.
She says her watch points have not yet been put to the test
since the collapse of Enron because most of the debt issues in
the bond markets have come from the strongest companies.
If investors are worried they should ultimately put their questions
to the management, who will need to provide answers. "Full
disclosure acts as a security blanket and we may well see
investors less willing to part with their money without it."
1 The things you can't see No one will spot these until it's too
late
2 The things you can see but aren't necessarily measured
The contigent liabilities that should have been added back
3 The things you can see but can be forgotten as time
goes on Accounting changes or adjustments made in previous
years
4 The things you can see but are subject to different
interpretations Is it debt or equity? should it be in the balance
sheet or not?
5 If the company's management won't answer the key
questions then _ Draw you own conclusions
Source: Barclays Capital
guardian.co.uk |
