The Skinny on Recent Corporate Accounting Scandals

It seems as though we’re hearing about a new corporate accounting scandal every day in the news. Enron and WorldCom are just two of the companies whose stock values have collapsed because of their use of questionable — and possibly illegal —accounting methods.

Small investors are getting stung, and so are large institutional investors — including the State of Florida. Many of these scandals have arisen when companies manipulated their business results in an effort to hide financial losses and boost their stock price.

Tip of the Iceberg or Bottom of the Barrel?

We probably haven’t heard the last of major corporate accounting scandal revelations. With the current intense focus on this issue, it’s likely more companies that have used aggressive or potentially illegal accounting methods will “come clean” rather than risk the consequences of being involuntary exposed.

What’s Being Done?

While it’s true that the Florida Retirement System trust fund has lost money on its investments in Enron and WorldCom, over the long term, the value of its assets overall has increased quite a lot. In addition, the FRS is taking a lead role among investors and legislators anxious to ensure that this doesn’t happen again.

  • Florida is the first state to sue a fund manager for losses relating to these corporate accounting scandals. The FRS is suing Alliance Capital, its former investment management firm, to recover a portion of the trust’s losses relating to the Enron collapse. The suit relates to Alliance’s continuing to invest in Enron even after the scandal first came to light.
  • New York, California, North Carolina and Florida are bringing pressure on top Wall Street companies to adopt conflict-of-interest policies as a condition of doing business with their employee pension funds.
  • President Bush has joined Congress in supporting increased corporate executive accountability for financial results and increased funding for the SEC, the government entity that regulates financial reporting for public companies. In fact, on July 30, President Bush signed corporate accountability legislation that makes it harder for companies to deceive investors.

What Can You Do?

If you’re in the Investment Plan, you’re already somewhat diversified, because the plan doesn’t allow you to invest in individual stocks like Enron’s. Instead, it offers instead over 40 investment funds, including both institutional and mutual funds, for you to choose from. In addition, there are three professionally managed balanced funds, which are already diversified to balance both returns and risks.

If you’re in the Pension Plan, you should feel reassured that the Florida Retirement System Trust Fund is in great shape. In any event, your Pension Plan benefit is guaranteed, so you do not need to worry about the market fluctuations.

All investors can learn a good lesson from these scandals: Remember how important it is to diversify your investments and not keep all your eggs in one basket. No matter how much research you may do on a stock, you may never know everything that’s going on. You can protect your total savings by investing in the stocks of many different companies, spreading your investment among various mutual funds, and — most importantly — investing in different types of investments: stocks, bonds and cash.