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American Morning

Dirty Rotten Numbers: Off the Books Investments

Aired February 05, 2002 - 09:38   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
JACK CAFFERTY, CNN ANCHOR: Some of the biggest companies rushing to revise their financial reporting in the wake of the Enron scandal.

In the current issue of "Fortune" Magazine, our editor at large, Andy Serwer, has a very interesting piece called "Dirty, Rotten Numbers." And it's about off-the-books investments. Tyco has made apparently 700 acquisitions...

ANDY SERWER, "FORTUNE" MAGAZINE: Yeah.

CAFFERTY: ...that no body knows a great deal about at this point. It's a fascinating article.

SERWER: Thank you, Jack. It really is a brutal season right now on Wall Street. I mean, that's the only way to describe it. Companies' stocks are getting marked down. Right now, we're separating the good from the bad. Here are some of the companies that are under the gun right now. Tyco, you just mentioned, they've got all kinds of problems. They're fighting for their credibility right now. They're making acquisitions, not talking about them. Paying board members off. Williams Companies, the giant pipeline company, they don't know where $2 billion are right now, Jack. That's kind of a problem.

CAFFERTY: Man!

SERWER: J.P. Morgan Chase has billions of dollars of exposure to Enron. They didn't do a great job of disclosing that to shareholders. Calpine, a lot like Enron. People are very concerned about that company. And RSA is a software company that is booking its sales while it ships the stuff, not when it gets the money. That's a no-no.

CAFFERTY: That's a fudge.

SERWER: That's a fudgey.

CAFFERTY: Yeah. Yeah.

SERWER: We don't like that, especially in this environment. It's a brutal time.

CAFFERTY: So then, what about good companies? There are a lot of good companies out there. And you know, the bad ones get the attention of the media and the investors...

SERWER: Right.

CAFFERTY: ...but there are good companies -- companies that are doing it right. In fairness, we should point out a couple of those.

SERWER: Yes, we should! Although, I'll tell you something, they're getting harder and harder to find these days. Boeing is, of course, the great plane maker. They show the cost of stock options. That's a big problem. The stock option is a huge cost. Boeing discloses it. Amerada Hess writes off bad exploration costs as soon as they happens. Doesn't try to spread them out over the years and hide them. FPIC, very conservative insurance company, and you can play a lot of in games in that business. Synopsys, kind of the opposite of RSA, very conservative software company.

And good-old Wal-Mart, this is the company -- going to be the biggest company in the "Fortune 500" this year, when we do the numbers. They're very up front about write-offs, more or less, pretty conservative with their numbers. And you know, they buy stuff and they sell it and they have a profit.

CAFFERTY: Yeah.

SERWER: I really sort of look forward to seeing those financial statements. They're so complicated now, I can't figure this stuff out and neither can the people on Wall Street. Sell it, have some expenses, then you have a profit.

CAFFERTY: Right. I wonder -- I wonder what it's going to take to restore the confidence of the investment community in the financial reports that they get quarterly from these publicly-traded companies.

SERWER: Well, I think that we're going to have a lot more flushing out. We're going to have a lot these companies just go down the tubes, and I think that's going to make it happen. And I think investors are going to start to shun stocks. We're actually seeing that right now. I mean, that's what this decline is all about.

CAFFERTY: Right.

SERWER: Investors shunning stocks. And when that happens, these CEOs and the CFOs are going to have to make their numbers clearer if they want their stock to still be attractive on the Street.

CAFFERTY: So, at the end of the day, ironically, the stock market may be able to do for this situation what government regulation and oversight has been unable to do, at least so far, which is to prevent these guys from playing the shell game with the earnings. If the stock market sniffs the slightest hint...

SERWER: Right.

CAFFERTY: ...of confusion or impropriety with the numbers, the share price will go south, and that will make them change quicker than anything. SERWER: Yeah, I mean, nothing makes a CEO wake up quicker than a stock going from $80 to $30. You can get all kinds jawboning from the SEC or a congressman, but when your stock goes down and your pay goes down with the stock declining, that's going to make these guys wake up.

CAFFERTY: "Dirty, Rotten Numbers" is the name of the piece. It's fascinating, it's in the current issue of "Fortune" Magazine. The author is my pal, Andy Serwer. Check it out. Thanks and I'll talk to you tomorrow.

SERWER: Thanks, Jack.

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