Enron's Disdain for Investors

While recent coverage of Enron centers on the CFO's past partnerships, a smaller -- and more obvious -- omission is what should really make individual investors turn the heat up on this company. Not only does it not release its cash flow statement during each quarter's conference call and press release, something we don't like but is prevalent, it also doesn't release its balance sheet. The company must think we're idiots. They're wrong.

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By Tom Jacobs (TMF Tom9)
October 24, 2001

Enron's (NYSE: ENE) troubles just don't stop. On Monday, the company announced that the Securities and Exchange Commission (SEC) had requested information on "certain related party transactions." That was a veiled reference to partnerships until recently organized and directed by Enron CFO Andrew Fastow. There has been a flurry -- a hailstorm -- of financial media attention to this. There are only three possibilities, and none is palatable:

  • The company's board allowed this deal in order to -- using corporate speak -- "incentivize" the CFO, and it was not legal; 
  • It was legal, but unethical; or
  • Enron has been less than forthcoming, perpetuating a pattern of disdain for investors and keeping them in the dark.

The accounting machinations involve mind-numbing terms and obfuscation, making a simple explanation of what is being alleged above my capacity to provide. The New York Times' Floyd Norris calls them "some of the most opaque transactions with insiders ever seen." That leads me to one conclusion when I think about burying myself with the company's SEC filings, accounting texts, my high-speed Web connection, and some beer: that of Shakespeare's King Lear -- "that way madness lies."

On the one hand, I know that pulling all this apart might teach me useful things about accounting, reading financial statements, and finding trouble. (To read what this is all about, check the "Certain Transactions" section of the company's latest proxy statement.) I fully intend to do that -- someday. For now, though, all I need to know about Enron as an investment is that the company has not made these issues transparent.

What's worse, though, is that Enron has made it a habit to keep investors in the dark, and not only about the potentially troublesome CFO issue. The company goes out of its way to hide its true financials. That really cheeses me off.

The quarterly call and press release parade
Most companies hold quarterly conference calls and simultaneously spew press releases (for which the companies pay good money to Business Wire and PR Newswire for dissemination) that allegedly state their latest quarter's numbers and talk about the business. Sometimes, when they have cleaned off their glasses enough for visibility and run it by their lawyers, execs will even venture to speak about the business climate ahead. At least thanks to Regulation Fair Disclosure -- "Reg. FD" -- analysts don't get a secret call with the "real" numbers at another time than the public. We like that.

Perhaps in a world of pro forma numbers and EBITDA -- both of which Phil Weiss has skewered appropriately in past columns -- the calls and press releases could never be expected to be that substantive. That makes individual investors increasingly correct to greet such information with cries of "bullfeathers!" It only takes a few reviews of earnings press releases to make anyone a skeptic. The PR department carefully dresses them with spin, leaving the details for the fine print. Headline: "Earnings up!" (Revenues down 40%.) Headline: "Revenues up!" (Earnings down 40%.) The skullduggery of spin and pro forma mangles earnings to meaninglessness.

At least the conference calls themselves allow you a sense of managers as people and potentially some information about the business, but the financials are not helpful. Why? 

Hiding the cash flow statement
Because almost every company gives up only part of the financial picture at call and press release time. If the income statement is increasingly unhelpful, at least the balance sheet tells you whether the company has increased or decreased cash, right? Well, not quite.

You really need the cash flow statement -- the best measure of how the company's business actually performs. Even then, you may need to make further adjustments. Yet the overwhelming majority of companies do not provide the cash flow statement at the call and press release time. 

Check the companies you own. If they don't release cash flow statements with their earnings -- or, at least, prior to SEC filings, you should write and otherwise hound investor relations to push management to do so. Encourage your fellow investors to do so too, and tell the company that The Motley Fool sent ya. They will maintain that the numbers aren't ready at earnings time. Tell them to wait until they are. The numbers are certainly ready in time for the SEC deadline, and wouldn't we be happy to wait a week or two for the complete picture? Or, hey, why not do two releases -- one when the earnings are ready and another for the cash flow?     

If not releasing the cash flow statement were Enron's only sin, it wouldn't be that big a deal. It has plenty of company. But this pre-Halloween scary tale gets worse. Unfortunately for Enron investors, the company does the hide-the-cash-flow-statement gig one better.

Hiding the balance sheet
For at least the last three quarters that I checked, Enron hides the balance sheet until SEC filing time. That's right: Not just the cash flow statement, but the balance sheet too. All they release is the income statement -- though, in truth, it does provide pages of income statement information for its many businesses. But why fail to release the balance sheet?

The only conclusion can be that management doesn't want to show its cash balances until it can slip them into SEC filings it thinks people won't bother to read. When questioners on a conference call earlier this year urged former Enron CEO Jeffrey Skilling to provide a balance sheet at earnings release, Skilling reportedly "called the questioner a common vulgarity that surprised many listeners."

Off his meds that day? Or a symptom of the company's attitude towards shareholders? Looks like the latter: Skilling's gone, but the practice hasn't changed. 

It's about management
We don't depend on management for the numbers during the quarterly public calls and releases. A publicly traded company's financials will appear a few weeks later through its SEC filings available through our Quotes & Data page. No investor should be buying -- or holding -- stock in companies if they don't read their filings carefully. It's hard enough to discern what's going on in a business without doing so, and even in those filings   -- such as with options grants to management -- the real meat is buried in footnotes. Not reading 10-Qs and 10-Ks is like getting married without dating, or buying a car by paint color only.

What Enron's failure to release this information says is that its management and corporate governance are sub-par. It says management is willing to hold these events, but it'll be darned if it'll present anything meaningful or make it easy for individual investors to find out anything other than management's spin. In Enron's case, its former CEO heaped abuse on someone who dared ask for a change. Does that make Enron's earnings releases circuses? Draw your own conclusion.

Is management listening? Perhaps. It hastily pulled together a conference call yesterday. TMF community member emschulze took notes:

"On call, analyst asks why no balance sheet with recent earnings release given company's previous claim that it will work to offer investors greater transparency in measuring its performance... response was that balance sheet doesn't normally come together until the week after its earnings release and that it will be included in 10-Q to be filed by Nov. 14... CEO indicates that it will do a better job of improving timing of release of earnings and balance sheet in future, implying that investors won't have to wait all the way until 10-Q filing deadlines to see balance sheet."

That's a good sign. But until the company makes an unambiguous commitment to provide the balance sheet at earnings time, Enron should be in the doghouse. 

Good corporate governance means companies release all their quarterly financial statements and discuss them at the same time because today's income statements and pro forma numbers are borderline useless. If it means a delay or a second release to get the numbers together, what's the problem? Shareholders should demand no less. When a company trumpets an income statement, as Enron has, no one should be surprised when smoke appears. And perhaps much more.

Tom Jacobs (TMF Tom9) would like to improve his own cash flow statement. At press time, he owned no shares of Enron. To see his stock holdings, view his profile, and check out The Motley Fool's disclosure policy.