Ed Wood "The Right Stuff" Published Aug. 7, 2002

The 40-inch yardstick

Unless you have been living on Mars, or some other remote planet, you are aware of the discovery of accounting fraud among some of our most prestigious corporations, aided and abetted by some of the country's largest accounting and financial investment firms. This has created an obvious uneasiness within the investment community.

One of the primary standards for measuring the value of a stock is its price/earnings (P/E) ratio. That is, the comparison between the selling price of a firms stock to its profit during a particular accounting period. The higher the reported profit, or earnings, the more an investor will pay for that company's stock. Higher stock prices are particularly beneficial to corporate executives who own large amounts of such stock, or who are entitled to purchase such stock at a predetermined, and generally lower, price.

So companies hire public relations firms to tout the value of their stock to potential investors. And there is nothing wrong with that. But an intelligent investor will realize such hype is just sales talk. The bare-bone facts on which a purchasing decision should be made are to be found in the company's financial statements - verified as being correct by government-certified public accounting firms, such as the Arthur Andersen Company.

But when the yardstick by which we measure the value of a company' stock, its financial statement, is stretched beyond acceptable limits, as was the case with energy giant, Enron Corporation, how can we, the investing public, make intelligent purchasing decisions? The fact is, we can't. And neither can the big boys - the mutual fund managers, and the 401K fund managers. And the recent plunge in the stock market reflects this mistrust.

What to do? Naturally, we are trained to look to our federal government for protection. But there are political foxes in our government henhouse, and an objective investigation is not likely in this, an election year. (And aren't they all election years any more?)

Senate Governmental Affairs Committee Chairman, and possible presidential candidate, Joseph Lieberman (D-CT), has taken upon himself the responsibility of investigating this problem, and recommending solutions. Testimony before his committee has revealed that investment banking giant, Citigroup, knew all along what the now bankrupt Enron Corporation was doing, and actually helped them pull off their financial trickery. Central to such an investigation should be the questioning of former Clinton Secretary of the Treasury, Robert Rubin, now the $40 million a year chairman of Citigroup's executive committee. When Enron started to go down, it was Rubin who tried to pressure the Undersecretary of the Treasury to lie about its solvency. When that failed, he tried to pressure Moody's Investment Services, and others, to enhance its evaluation of the company. That also failed, and the result is history.

Will Lieberman call Mr. Rubin to testify before his committee? In response to reporters questions, Lieberman's answers have ranged from a flat "No!" to "If Mr. Rubin would add something, I don't have any hesitation to call him." Sen. Fred Thompson (R-TN) said calling him "probably would be a good idea." But his testimony is not likely. Why? Well, Sen. Rick Santorum (R-PA) put it best: "It would not be a popular thing for Lieberman to do. It would not enamor him to the Democrat faithful around the county."

So while our politicians continue to act like politicians, the stock market continues to slide because we can no longer rely on the only financial yardsticks we must use to make intelligent decisions - corporate financial statements.

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Ed Wood is a resident of Sparta, TN. His column is published each Wednesday in the Crossville Chronicle.