Since the Enron bankruptcy (the largest in History), many investors are convinced that companies frequently cheat in their financial reporting.
We call it instead: creative accounting … who said accountants don’t have imagination !!! Company management is continuously under pressure to produce good short term results. They therefore, bend the rules a little bit to show good quarterly results. Are they all crooks ”à la Enron”? : absolutely not. Nevertheless, we must be prudent and must also have a good methodology to evaluate companies. Tyco got caught in this storm. We took advantage of the situation and built up a position which has brought good results so far. What are some companies to watch: Cisco, IBM, GE, … We will probably buy some, one day, at a better price.
The positive effect of Enron is that future financial reporting will better reflect the economic reality of companies. Management will be more conservative and the big accounting firms more vigilant since nobody would want to relive the experience of Enron or Tyco or Arthur Anderson.