`I am not a crook,” President Richard M. Nixon declared at the height of the Watergate scandal.
His words bear striking similarity to recent denials of wrongdoing by executives of Enron Corp. and the Andersen accounting firm, as they try to avoid blame. Meanwhile, securities analysts and government officials are trying to distance themselves from the transgressions of what was once the nation’s seventh-largest company.
Under this increased scrutiny, scandals involving accounting practices of other companies are cropping up. Accounting firms are scrambling to separate audit functions from consulting, while brokerage firms are separating analysts from other company business. The government is taking aim at everything, including 401(k) investing.
“How could this Enron mess have gone undetected?” a woman in the audience recently asked a panel of business journalists.
Despite thoughtful responses from journalists of top business publications, I doubt anyone came up with satisfying answers to her question. Yes, the media, like everyone else, definitely should have done better. While there was some foreshadowing, the nature and severity of the Enron disaster was missed.
“Every once in a while all the planets align for a situation that includes corporate governance problems, management problems, auditor problems and analyst shortcomings,” warns John Markese, president of the 180,000-member American Association of Individual Investors in Chicago. “While it’s unlikely an investor could have discerned Enron’s problems from published financial statements, anyone who invested without understanding how the company made money was making a mistake.”
The investor must be vigilant. Monitor companies, accounting firms, securities firms and the government as they work to clean up this mess. But also carefully research each investment you make, read everything and be your own final counsel. Know what you’re investing in and always diversify your holdings.
Ironically, Federal Reserve Chairman Alan Greenspan accepted the Enron Award for Distinguished Public Service just last November, though he didn’t accept the $10,000 honorarium.
Just as ironically, with Enron considered an attractive “pro-environment” energy firm because of its trading and natural gas operations, it was in the portfolios of many socially conscious mutual funds emphasizing “good citizen” companies.
Pax World Balanced Fund, one of the largest ethical funds, had Enron as its No. 1 holding for part of 2000. Until Enron went bankrupt, it was also a component of two socially screened stock indexes. Pax World made money because it sold most of its shares before they declined. Still, the fund’s screening process for accounting firms that strayed from their primary audit duties failed to raise red flags.
“If 75 percent of an auditor’s revenues are derived from non-audit activities, we always vote against that auditor in the company’s proxy vote, but, unfortunately, the Enron situation wasn’t at that level,” said Christopher Brown, who manages Pax World Balanced Fund, Portsmouth, N.H. “We’ve dropped that threshold substantially and will be voting against more company auditors in the future.”
But take heart. Many companies worth investing in do live up to the public’s trust.
For example, Brown points to Medtronic (MDT), a cardiac medical technology company, because it makes significant charitable contributions, treats employees well and has a workplace diversity program. Amgen (AMGN), a biotech company in human therapeutics, has an employee volunteer program and is active in reduction of solid waste. Discount retailer Family Dollar Stores (FDO) made a formal commitment not to support sweatshops.
“With investors wary of company information, holdings of our investment clubs have swung the last couple of months toward firms people really understand,” said Ken Janke, president of the National Association of Investors Corp. (www.better-investing.com), which sponsors clubs. Most corporations are honest in what they do and report, Janke believes. Yet no matter what laws Congress enacts or what the Securities and Exchange Commission does, there will always be someone who will “cook the books or do something else illegal,” he said.
“The market is also at fault for putting so much pressure on firms to perform consistently in the short term and come up with numbers analysts want,” concluded Arthur Brief, business professor at Tulane University in New Orleans.