If you had told me a year ago that the earnings of a high-flyer would spark a major scandal, the odds are I would have picked a high-tech company such as Cisco Systems. Instead it's Enron. The company transformed itself from a provider of natural gas into the world's largest energy trader. In the process, it became the darling of money managers, the Texas establishment and the supporters of deregulated energy. And then, almost without warning, it turned into one of the most spectacular financial collapses in history.
It's ironic that the Enron debacle has led to cries for reform, when it is technology stocks--not energy companies--that have been the masters of earnings dissimulation. Over the past two years, the techs have twisted and turned their financial reports to beat analysts' earnings projections and justify their sky-high prices.
From peak to trough, Amazon.com's market value sank by $35 billion as Jeff Bezos (Time magazine's "person of the year" in 1999) claimed that his company was profitable on a "proforma basis". But let's get real: the company's proforma profits were found by ignoring interest payments on nearly $2 billion of debt. That's like saying my holiday home doesn't cost me anything--as long as I forget about the mortgage payments.
And then there is Cisco. Remember when Cisco was the most valuable company on Earth? Then it gave up a mammoth $450 billion in market value, or more than six times the loss that investors suffered over Enron. Chairman John Chambers, who promised 30 per cent earnings growth no matter what, can also be questioned about his accounting practices. Chambers transferred losses to income by writing off inventories that he couldn't sell at the price he hoped. Moreover, many have questioned the way Cisco accounts for its acquisitions, claiming that the techniques it uses distort its earnings in a way that makes it extremely hard to judge the company's true profitability.
Amazon and Cisco are not alone. Many technology companies manipulate their earnings. Last year Steve Milunovich of Merrill Lynch conducted a detailed study of tech companies and reported that their earnings were overstated by an average of 25 per cent, compared with what they would be if they worked to generally accepted accounting principles.
By tech standards, investors' losses in Enron are small fry. Between the peak and the trough, technology stocks shed well over $1 trillion in market value. Enron lost only about $70 billion. It's...