Financial Analysts and Enron: Asleep at the Wheel?
Financial Analysts and Enron: Asleep at the Wheel?, Arline Savage and Cynthia Miree. Copyright © 2003 by Austin Murphy. Reproduced with permission of ABC-CLIO, LLC.
NOTE: At the time of publication, the author Arline Savage was not yet affiliated with Cal Poly.
We attempt to replicate the duties of financial analysts by performing accounting and financial analyses for Enron, using information contained in the firm's Security and Exchange Commission filings and in annual and quarterly reports that were available to analysts prior to the firm's collapse. We focus on Enron accounting policies, estimates, and financial measures that reflect the key risk areas that we identified in our strategy analysis.
Given that the purpose of accounting analysis is to evaluate the degree to which a firm's accounting system captures its underlying economic reality, we attempt to assess the degree of distortion in Enron's reported numbers, based on our comfort level with management's choice of accounting policies and estimates. The purpose of our financial analysis is to assess the performance of the firm after its efforts to negate the effects of perceived distortions in the reported numbers. We ask, and attempt to answer, the question of whether financial analysts should have seen warning signs of Enron's collapse and should have warned investors of the firm's precarious financial situation long before the unfortunate event surprised stockholders and creditors alike.
Our detailed analyses show that from 1997 onward there was evidence of reporting and performance problems. We highlight areas of major concern about profitability and debt levels.
Although Enron management makes an abundance of information available to analysts, the language is not always clear; it is confusing even to accounting experts. The vast amount of information makes the analyst's job time consuming and tedious, yet essential information, such as separate disclosures of unrealized gains on trading activities, is not available. This does not, however, excuse analysts who overwhelmingly would not see the woods for the trees, and who continued recommending to clients that they buy or hold Enron stock.
Our investigation shows that the red flags were plentiful and that the situation was aggravated by the incidents of apparent disdain (reported in the news media) with which Enron's top management dealt with financial analysts. The results of our accounting and financial analyses raise issues about the competence, independence, and objectivity of analysts who continued to recommend this stock.
Arline Savage and Cynthia Miree. "Financial Analysts and Enron: Asleep at the Wheel?" Practical Financial Economics: A New Science. , 2003. 75-101.
Available at: http://works.bepress.com/savage/15