How Companies Lie

by Alan Lavine and Gail Liberman

They ought to teach those MBAs ethics in business school. Then, just maybe, we wouldn't have so many problems with fuzzy numbers that corporations report to shareholders.

About 60 percent of American families invest in public companies through individual stocks or mutual funds. But Larry Elliott, author of "How Companies Lie (Crown)," says too many senior executives, boards of directors, audit firms and government regulators participate in "economic terrorism."

Management experts Elliott and his co-author, Richard Schroth, have studied hundreds of companies. When companies like Enron cook their books, they say, others suffer. For every Enron that comes to light, they claim there are a lot of other companies intentionally deceiving the public about their financial health.

The two say companies that lie on their financial statements and makes bogus projections also may take advantage of customers.

For example:

* Airlines lie to passengers about how long a plane will be delayed so that passengers won't switch to a competing carrier.

* Drug companies try to get customers to ask their doctors for prescriptions they don't need.

* Top executives quietly sell their stock because they know about future problems that won't surface for months.

* Investment banks and their analysts issue "buy ratings" on stocks they know to be in big trouble to protect their cozy relationships.

* Mergers and acquisitions are initiated just to cloud a company's real financial situation.

The authors serve up a checklist to help you tell if a company is going sour. Their list includes these warning signals.

* Abrupt turnover of a company's chief executive officer and senior executives.

* High insider stock selling by key management.

* Restatement of earnings or earnings that come in below expectations.

* Securities and Exchange Commission inquiries or warnings for aggressive accounting.

* Special complex partnerships and financial instruments.

* Elaborate compensation and stock option plans.

* Complex Securities and Exchange Commission filings.

* Sudden downgrades in bond and credit ratings.

* Withdrawal of investments by hedge funds, which are privately managed investments for high-net-worth individuals.

Alan Lavine and Gail Liberman are husband-wife personal finance columnists, journalists and authors. They are the authors of "The Complete Idiot's Guide to Making Money with Mutual Funds," published by Alpha Books. Their columns appear in newspapers throughout New England and the Southeast, as well as online. Their commentary on mutual funds and personal finance is carried by 200 radio stations nationwide every Sunday over Business News Network's Charles DeRose Financial Advisor Show.

More articles by Al and Gail can be found here.