Yup.
Everyone jumps to the Enron analogy. But an outright fraud of that scale is rare. What happens more often is variations of the same thing: the company plays with accounting rules and does financial engineering, hoping that it will fix itself in the next quarter. But as you say, if it persists over multiple quarters, especially if the magnitude of the suspicious fields increases, then something is wrong. It still doesn't mean fraud but the stock will suffer.
GE is a more common example. For a long time GE Financial was a closet hedge fund. Not the super risky kind, but huge (relative to the size of the company) and opaque. The clearest evidence was that GE was always able to beat their earnings number by a penny. They just had no fluctuations between their guidance and reported numbers. Eventually that opacity and ability to manipulate the numbers proved to be too tempting.
Xerox was a worse case. Almost close to Enron (still not quite). They started out with playing fast and lose and financial engineering the numbers. The problem wasn't systemic. Much of what killed them was the result of their sales bonus structure. Some customer returned a big order. Sales shifted it to the next quarter, hoping that the new orders will make up for it. But they didn't and fell a bit. So near the end of the quarter, sales guys shipped extra orders to customers so they can record the numbers and make their quota. The whole thing snowballed and got out of hand. Within a year a good chunk of the reported revenue was ghost sales that nobody had ordered. Sales would just ship it at the end of the quarter, recognize the revenue, then the customer would return it 2 weeks later.
Then there was Cisco...somewhere between these two. They really believed in their super smart omniscient forecasts.
So yes, all kinds of things can go wrong when you are running hot and trying to meet too much expectations. People should be aware of this and the volatility it causes just by the rumor and suspicion.
BUT Just yesterday or the day before an internal memo in Google said that they need to double their AI capacity every 6 months just to meet demand... Their demand. So for now, the idea that nVidia is another Enron or filling in ghost demands like Xerox or is a closet hedge fund / VC firm, etc is not very viable. |
