Risk & Compliance

Subtract Half a Billion: Enron Admits It Overstated Earnings

Company also says related-party deals netted ex-CFO $30 million. Other news: Mishandled layoffs are damaging corporate brands, and marketing execs ...
Stephen TaubNovember 9, 2001

Management at Enron Corp. admitted Thursday it overstated earnings for nearly five years.

In an SEC filing Thursday, Enron said financial statements from 1997 through the third quarter of 2001 “should not be relied upon, and that outside businesses run by Enron officials during that period should have been included in the company’s earnings reports.

As a result, Enron is reducing earnings for those years by $586 million, from $2.89 billion to $2.31 billion.

The company also acknowledged that part of last year’s earnings came from deals with partnerships controlled by recently sacked CFO Andrew Fastow. These transactions are already being investigated by the Securities and Exchange Commission. Enron said these deals enabled Fastow to earn more than $30 million.

Enron also conceded that three entities run by company officials should have been included in its financial statements, based on generally accepted accounting principles.

In another surprise, Enron management reported that it fired Ben Glisen, company treasurer, and Kristina Mordaunt, general counsel for the North America unit.

In addition, the company revised its debt upward in each year from 1997 to 2000. As a result, Enron’s debt at the end of 2000 was $10.86 billion, $628 million more than previously reported. This, of course, calls into question the company’s current credit ratings.

Enron also slashed its shareholders equity for the period ending September 30 by $2.2 billion, or 19 percent. This is much larger than the $1.2 billion reduction the company initially reported.

Kenneth Lay, Enron’s chairman and chief executive, said in the filing, “We believe that the information we have made available addresses a number of the concerns that have been raised by our shareholders and the SEC about these matters.”

Well, Enron addressed this week’s concerns, anyway.

Layoff Image is Everything

The technique a company uses in handling layoffs affects its corporate brand, as well as that company’s future ability to attract employees. This is Andersen’s primary finding in a recent survey conducted with Vault Inc.

“The survey results show that companies are not handling layoffs well and, in fact, may be eroding their brand and their reputation as an employer,” insists Chris Ryan of Andersen’s human capital practice in Chicago, in a press release. “Ex-employees will be more likely to buy products from the company, [or] recommend the organization as a good place to work or rejoin at a later date, if the company communicates the reasons for the layoffs effectively and handles them in a manner that treats departing employees with respect and dignity.”

Here are the key findings from the national online survey of more than 1,200 workers who were recently cut:

  • 86 percent reported no opportunity to apply for other positions in the company.
  • 71 percent blame company leadership for the layoff.
  • 70 percent of the workers would not recommend that others work for the company.
  • 67 percent would never work for the company again, even if extended a job offer.
  • 54 percent said that they would not recommend the company’s products or services to others based on the way the layoff was handled.
  • 49 percent of those surveyed felt that the layoff was done in a manner inconsistent with the company’s values.
  • 44 percent did not think the company effectively communicated the rationale for the cuts, yet effective communication about the job cuts was more important to those surveyed than additional benefits such as job-search support or extended health care.
  • 15 percent have considered taking legal action against the company.
  • 11 percent have considered speaking to the media or a public source about their experience.

“Given the shortage of talent we are bound to experience again when the economy rebounds, companies that downsize need to consider the repercussions on their ability to attract and recruit new talent in the future,” said Ryan.

According to Andersen, former employees felt especially dissatisfied when they:

  • Felt the company did not effectively communicate the reasons they were being laid off.
  • Were subject to the company’s security measures, such as having locks changed or being escorted by security personnel.
  • Believed the responsibility for the layoff rested with their immediate supervisor.
  • Were given no severance.
  • Were not given the opportunity to apply for other open positions in the company.
  • Were asked to reapply for their current job.
  • Felt the reason they were let go was salary-related.
  • Were laid off via a telephone call.

Andersen claims that employees who were laid off under these circumstances were more likely than others to take legal action or consider other ways of hurting the company.

On the other hand, employees felt more positive about the situation if they believed the reason for the layoff was the economy or their personal performance.

Just Say No to Brand ROI

Ah, the CFO’s eternal quest: Trying to figure out what kind of return a company gets on its marketing spend.

Now, a new survey seems to indicate that maybe CFOs should just stop trying.

Indeed, nearly 75 percent of corporate marketing executives in the U.S. and the U.K. say that their companies are unable to measure a marketing campaign’s return on investment (ROI), according to a study released by Accenture. The study was based on interviews with 175 executives earlier this year.

Even more surprising, 70 percent of these executives say they continue to have trouble capturing the attention of customers, and 65 percent are struggling to integrate and share customer data across the organization (through the Web, call centers, and other means) to develop a single view of the customer.

In addition, 58 percent of marketing executives frequently struggle to shorten the cycle time it takes to create and launch a marketing campaign. Nearly 20 percent of companies take more than four months to develop and launch a campaign, and 33 percent take between two and four months. The average company’s campaign cycle time is approximately two-and-a-half months.

What are marketing heads’ most pressing needs? The top priority is access to more accurate and fresher data (68 percent), integration between the numerous customer touch points (67 percent), better overall customer strategy (67 percent) and more collaboration, both within the function and with the sales and customer service departments (59 percent).

“Customers are becoming less loyal to brands,” said Pat O’Halloran, partner at Accenture’s Customer Relationship Management practice, in a press release. “They use new sources of information to build impressions and make decisions in buying a product or service. Yet marketing executives are not equipped with the tools they need to keep up with the changing customer expectations, achieve greater share of wallet, and maximize the lifetime value of customers.”

Financing News

  • Burlington Resources Inc. raised $1.5 billion in a three-part private placement of debt, led by Merrill Lynch & Co. and Morgan Stanley. It issued $500 million of 5-year notes priced at 202 basis points over comparable Treasurys, $500 million of 10-year notes priced at 225 points over Treasurys, and another $500 million of 30-year bonds priced at 245 points over Treasurys. All of the issues were rated Baa1 by Moody’s and BBB-plus by Standard & Poor’s Corp.
  • Emerson Electric issued $250 million in 12-year notes, priced to yield 5.632 percent, or 135 points over Treasurys. It was rated Aa3/AA-minus.
  • First Data Corp. added $300 million in debt to its existing $1 billion two-part debt sale, led by Bear, Stearns & Co. The company added $200 million to the first tranche and $100 million to the second tranche. It was rated A1/A-plus.
  • Weatherford International Inc. issued $350 million in 10-year senior notes in the private placement market, led by Credit Suisse First Boston and Lehman Brothers Inc. It was priced to yield 6.742 percent, or 245 points over Treasurys, and was rated Baa1/BBB-plus.
  • Bermuda-based insurer White Mountains Insurance Group Ltd. filed a shelf registration to offer up to $1 billion worth of debt securities, preference shares, preferred securities, and guarantees. The company also said it would offer junior subordinated debt securities. It expects to use proceeds for general corporate purposes, including repayment of borrowings, working capital, capital expenditures, share repurchase programs, and acquisitions.
  • Moody’s upgraded the short-term debt rating of Lockheed Martin Corp. to Prime-2 from Prime-3 and the long-term debt ratings (senior unsecured) to Baa2 from Baa3. “The rating actions consider the company’s success in addressing the operating and financial challenges which were encountered during the last several years and the potential for further improvements in the company’s operating performance, cash flows, and balance sheet,” Moody’s said in a statement.