Buyer beware

May 29, 2002

IT'S BEEN a tough year at the world's most credible financial mega-mall - Wall Street - one that should serve as a cautionary tale for anyone who goes shopping there.

This mall's business is still good, of course. Seeking slices of high-quality companies at fair prices, buyers come from all over the world to its lofty outlets, where salesmen-brokers take healthy cuts from their purchases right off the bat. That's considered a small price to pay - in part because these retailers also provide advice from their famous analysts.

Never mind that the analysts often are so highly paid because their buy-side opinions - sell is not in their public vocabulary - also serve retailers' lucrative trade in taking companies public. (See Merrill Lynch's wrist-slap settlement last week over such conflicts.)

Having purchased that touted stock, buyers become owners and make or lose money based on their companies' earnings, as expressed in corporate accounting. Big-name independent auditors verify those numbers.

Never mind that these accountants are not independent, as they're heavily influenced by the fees they earn as consultants to the same companies. (See the Enron-Arthur Andersen scandal and accounting problems at such firms as Global Crossing, WorldCom, Xerox and Halliburton.)

And never mind that these consultant-accountants sometimes make money by teaching companies how to show profits without really making money - off-loading debts and losses to separate spinoffs (see Enron again), moving pension-fund earnings into balance sheets (see 13 percent of General Electric's earnings), or moving out of the country to lower their taxes (see the thousands of U.S. firms that have set up in Bermuda).

Even without profits, corporate managers typically are richly rewarded - often with stock options. This is both compensation and an incentive, stockholders are told, but it's not usually counted as a company expense. Never mind that options ultimately cost stockholders because future corporate earnings are spread across a greater number of shares, thereby lowering those shares' value. (See business opposition to efforts to count options as expenses.)

Obviously, not every shopper fares well at this mega-mall. Unhappy stockholders can return to its retailers and sell their corporate slices. Never mind that the price may have plummeted, in part because corporate managers already have dumped their shares. (See Enron again.)

Then, of course, the salesmen-brokers get to take another cut, off the top of these sales. (See brokers' long-running problems with churning, or excessive trading.)

Calm down now. Corporations are watched over by directors; never mind that they're increasingly chosen by firms' managers. Wall Street's history is of ever-greater regulation; never mind that it's still largely privately run and inconsistent.

And never mind that intensive corporate lobbying in Washington tries to keep it that way. (See opposition to Maryland Sen. Paul Sarbanes' much-needed legislation creating a federal body to enforce auditing standards.)

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