It’s Time to sell Your Stocks and Buy Gold
Enron is the tip of the iceberg - In 2001, with 'pro forma' creative accounting, the top 500 US listed companies were able to report earnings of 42 percent more than that allowed by 'generally accepted accounting principles', writes David Podvin in an article, Multi-Trillion Dollar Financial Scandal.
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AMERICA INFECTED WITH ILLEGAL ACCOUNTING METHODS
Posted By: Boudewijn Wegerif
Date: Saturday, 9 February 2002, 4:44 p.m.
MULTI-TRILLION DOLLAR FINANCIAL SCANDAL -
'This Thing Involves Everybody'
By David Podvin - February 4, 2002
"Immediately after business slave George W. Bush took power, Corporate
America went on a lying spree. 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."
MISSING THE OVERALL
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 big story.
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
irrelevant, thereby providing great latitude for creativity.
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
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 Microsoft. 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
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 earnings. Harvey Pitt.
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 purposes, dead.
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 public.
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 story.
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."
New Economic System for the Kingdom of God
¤ Accounting For Options (item 3), Chetan J. Parikh, Capital Ideas Online,
May 31 - June 13, 1999
¤ Issue S&P P/E 37, Carl Swenlin, AegeanCapital Inc., August 3, 2001
¤ Earnings Report Parodies, Comstock Partners, Inc., October 11, 2001
¤ Smoke and Mirrors, Comstock Partners, Inc., August 22, 2001
¤ How we got into this corporate mess, Dan Gillmor, TheDailyCamera.com,
December 24, 2001
¤ Spin on tech financial results comes under more scrutiny, Scott Herhold and
Mary Anne Ostrom, SiliconValley.com, January 31, 2002
¤ Disney Profit Beats Forecasts, Clouds Remain, Bob Tourtellotte, Reuters,
January 31, 2002
¤ Enron: Could your stock be next?, Paul R. La Monica, CNNMoney, November 30, 2001
¤ "William 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 (GE: down $1.23 to $38.50, Research,
Estimates), 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.]
¤ Viacom beats Street, CNNMoney, October 25, 2000
¤ News Corporation Reports Double Digit Film Operating Income Growth in First
Quarter, Business Wire, November 7, 2001
¤ Notes to Consolidated Financial Statements, The Washington Post Company,
2000 Annual Report As predicted, second-quarter results grim for
newspapers, Tara McMeekin, Newspapers & Technology, September 2001
¤ Wider loss for AOL Time Warner, Tribune News Services, January 31, 2002
685 or 310-399-2215.
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