The Breaking Point

Just as the Olympic figure skating scandal will change that sport for the better, the Enron debacle is seeing some positive aftereffects. Investors reached a breaking point, and have rallied to flush out opaque accounting techniques from some of the world's largest companies. It's up to us to keep the momentum going.

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By Rex Moore (TMF Orangeblood)
February 21, 2002

In the past couple of months we've seen some striking parallels from the world of sports and the world of finance, and we've learned a lot about what happens when people reach a breaking point. Both of these worlds experienced scandals that exposed the very worst they have to offer, but both may be the better for it in the end.

First, let's look at the sport of figure skating. You've all heard about it, so it only needs a brief recap: The pairs competition at the Winter Olympics had boiled down to a battle between Canadians Jamie Sale and David Pelletier and Russians Elena Berezhnaya and Anton Sikharulidze. The Canadian pair turned in what is almost universally considered to be a superior performance. However, Berezhnaya and Sikharulidze took first place by a vote of 5-4. Afterward, French judge Marie Reine Le Gougne admitted she was pressured by her own federation to vote for the Russians instead of the Canadians.

A week of uproar ensued, and a sport that has had a long history of questionable decisions and charges of political alignments was teetering on the edge of catastrophe. Commentator Sandra Bezic said she was "completely shocked and disillusioned," and many were associating figure skating with boxing or, worse yet, professional wrestling where the outcome is decided beforehand. (Sorry to spoil that for you, TMF Bogey.)  It was clear that skating insiders and the public had lost confidence in the system, and the sport's officials had to act.

Act they did, of course, by suspending the French judge and tossing out her vote. Thus tied 4-4, the pairs were declared co-champions and Sale and Pelletier were awarded gold medals.

(A quick time out here. Why isn't there a huge uproar about the remaining four judges who placed the Russians first? Whether their program was more technically demanding or not, they flubbed it. The French judge deserves her suspension, and I think the other four should face some sort of punishment also. But that's just me, and I'm the last person you'd want judging this stuff. I'd take a half-point from anyone wearing sequins.)

Skating officials are now talking about ways to have their sport judged more fairly, and some promising solutions are being bandied about. (One includes using 14 judges, but having only a random seven of their marks count. To make things interesting, I think they should only pay the seven judges whose scores don't count. But that's just me.)

At any rate, that scandal effected positive change. Fans had reached the breaking point, the sport's credibility was about to dip lower than a Wall Street analyst's, and something had to be done. Figure skating will be much the better for it in the future.

Back in the financial world, the Enron scandal is having the same positive effect on the U.S. markets. The deceit and arrogance shown by company executives, and the damage it caused, have enraged investors so much that they've reached a breaking point. They are demanding more transparent accounting from corporations, and they're starting to get it.

In the past week, two absolute giants of American industry gave in to pressure and decided to make their financial statements easier to understand. First, IBM (NYSE: IBM) stepped to the plate. Last Friday, a New York Times article suggested Big Blue only beat fourth-quarter earnings estimates because it recorded a $300 million gain for the sale of a business to JDS Uniphase (Nasdaq: JDSU) as an offset to SG&A expenses rather than as a one-time gain. That turned out to be the last straw in what was a rather long history of IBM's "overly aggressive" accounting, and on Tuesday the company agreed to provide more detail in its financial disclosures, giving investors a much better chance to make informed decisions. (Whitney Tilson's Fool on the Hill column yesterday provides an excellent look at what IBM has done in the past, and why the stock may be in for some rough times in the future.)

Then, yesterday, the bluest of the blue chips announced it was making some changes in the way it reports its financial dealings. General Electric (NYSE: GE) promised it would break out information for two-thirds of the 36 companies it owns. As CEO Jeffrey Immelt told The Wall Street Journal, his company will provide more details even "If the annual report or quarterly report has to be the size of the New York City phone book...."

GE is the largest company in the world, with a market cap of $373 billion. A sprawling giant, it has its hands in everything from appliances to broadcasting to financial services, and investors need all the help they can get, even if it does take a phone-book sized annual report.

IBM and GE are not the only two companies with changes in the offing. Tyco (NYSE: TYC) recently promised greater disclosure to its shareholders and has started holding weekly conference calls for investors. It had been under fire after news broke that it hadn't disclosed 700 acquisitions over the past three years, worth some $8 billion. Tyco's excuse? The acquisitions did not have enough "material" impact on the business to merit individual press releases.

Things like that may have flown before, but not now. In Tuesday's Motley Fool Take, I said the Enron scandal has proven to be a cleansing enema for corporate America. Investors are mad as hell, and they're not going to take it anymore. Tyco, GE, and IBM heard the howls, and to their credit are moving in the right direction. Things are starting to snowball, and, as individual investors, it's our job to keep the momentum going.

A few companies thus far have taken the "Enron enema." Who's next?

Rex Moore absolutely loves working for a company that lets him talk about enemas and sequins. At press time, he owned shares of Tyco. All of his holdings are viewable online, thanks to The Motley Fool's disclosure policy.