In this commanding big-picture analysis of what went wrong in corporate America, Alex Berenson, a top financial investigative reporter for The New York Times , examines the common thread connecting Enron, Worldcom, Halliburton, Computer Associates, Tyco, and other recent corporate scandals: the cult of the number.
Every three months, 14,000 publicly traded companies report sales and profits to their shareholders. Nothing is more important in these quarterly announcements than earnings per share, the lodestar that investors—and these days, that’s most of us—use to judge the health of corporate America. earnings per share is the number for which all other numbers are sacrificed. It is the distilled truth of a company’s health.
Too bad it’s often a lie.
The Number provides a comprehensive overview of how Wall Street and corporate America lost their way during the great bull market that began in 1982. With fresh insight, wit, and a broad historical perspective, Berenson puts the accounting fraud of the past three years in context, describing how decades of lax standards and shady practices contributed to our current economic troubles.
As the bull market turned into a bubble, Wall Street became utterly focused on “the number,” companies’ quarterly earnings. Along the way, the market lost track of what companies are really supposed to do—build profitable businesses with sustainable futures. With their pay soaring, and increasingly tied to their companies’ shares, executives were more than happy to give Wall Street the predictable earnings reports it wanted, what-ever the reality of their businesses. Accountants, analysts, money managers, and individual investors played along, while the Securities and Exchange Commission found itself overwhelmed and underequipped to cope with the earnings game.
The Number offers a unified vision of how today’s accounting scandals reflect a broader system failure. As long as investors remain too focused on the number, companies will find ways to manipulate it. Alex Berenson gives anyone who has ever invested in—or worked for—a public company the tools necessary to see beyond the cult of the number, understand accounting and its limits, and recognize patterns that can lead to fraud. After two decades of stock market hype, The Number offers a welcome dose of truth about the way Wall Street and corporate America really work.
From the Hardcover edition.
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|Title of eBook: The Number|
|Release Date: 03-04-2003|
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|Publisher: Random House Publishing Group|
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Chapter OneBOOM AND BUST
It had been a very long week for J. P. Morgan Jr.
Morgan-the world's leading financier, the personification of Wall Street-had endured days of testimony before the Senate Banking and Currency Committee about his firm's misbehavior during the 1920s boom and the crash that followed. Under pointed questioning by Ferdinand Pecora, a hard-charging New York prosecutor who was the committee's chief counsel, Morgan admitted that he and many of his partners had not paid any taxes in 1931 and 1932, with the Depression at its worst. He acknowledged that earlier, at the height of the bubble, his firm had offered government officials the chance to buy shares in a hot new company at a below-market price. With 25 percent of all Americans unemployed, with banks failing and farmers starving, these revelations did not elicit great warmth. A generation later, The New York Times would call the inquiry "remarkable for its unfriendliness even in that year of bankers' general unpopularity."
That year was 1933. And on the first day of its sixth month-Friday, June 1-at 10 A.M., in a Senate hearing room crowded with reporters and photographers, Morgan and his aides waited for another difficult day to begin.
Then the midget showed up.
The reason Lya Graf came to the Senate that day has been lost to history. Her employer, the Ringling Brothers and Barnum & Bailey Circus, was in town, but Graf had no obvious reason to make her way to the Capitol. Perhaps Ringling was looking for some easy publicity; a Ringling press agent named Charles Leef had accompanied her. Perhaps she just wanted to see Morgan in the flesh. If...