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Has Doomsday passed?

Enron could have just been the tip of the iceberg. A wave of questions concerning corporate accounting could have brought the stock market down into a continuous freefall. A depression in spending, a banking crisis and a Great Depression type scenario could have followed the market crash. Was that concern valid? Has the danger passed?

The Enron situation says as much about what is right with our system as what is wrong with it. It was sad for employees and stockholders what the management of Enron got away with. The bottom line is that the system, as flawed as it was brought the trouble to the surface and alerted the markets to the dangers.

The dirty laundry was found, hung out for all to see and Congress to snipe at and the market seems to have gotten beyond it. If there are no more high profile collapses, confidence in the markets and accounting can be restored.

One of the things that might help investor confidence is a move away from pro forma accounting. This loose, make your own rules type accounting allows corporations to distort the earnings they report to their shareholders.

For example, company X has to write off $50 billion to account for the fact that they paid too much for a series of acquisitions. Okay, they just printed a lot of overpriced stock to make the takeovers, but there still is an accounting issue. Pro forma accounting allows you to say, hey, we really made $60 million last year and we had this one time write off of $50 billion, but that shouldn't count against earnings. It wasn't a cash expense right?

There I another kind of accounting called GAAP accounting that has stricter rules. Rules that investors can rely on. GAAP stands for Generally Accepted Accounting Principles. It says that $50 billion is an expense, and it needs to be subtracted from earnings.

You might see a scenario in the weeks ahead where a company that announces its earnings will be calculated according to GAAP will see its stock price rise. The reason is simple, confidence.

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Shmuel Protter
investmenttool.com

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