Enronitis Outbreak Spreads to Fort Smith (Commentary)

The pundits are calling it “Enronitis,” the contagious fear that any publicly traded company’s financial statements might be suspect. Arkansas is not immune.

On the same day that a 220-point drop in the Dow Jones Industrial Average was blamed on Enronitis, Superior Financial Corp. of Little Rock announced that it was actively searching for possible accounting irregularities during the tenure of a comptroller who was fired in November.

The Superior case is particularly curious because the former comptroller, Jeff Chism, has claimed publicly that he advocated more conservative accounting than the approach preferred by top executives and approved by their outside auditors.

Specifically, Chism claimed he told CEO C. Stanley Bailey and other executives that the $3.72 million cost of a software conversion should have been charged against earnings in the third quarter of 2001. But the company and its accountants at Ernst & Young decided to spread the pain over the third and fourth quarters.

Superior has not disputed the nature of the disagreement. The company has, however, accused Chism of either negligently or knowingly allowing his girlfriend, the bank’s former electronic banking manager, to convert some $45,000 to her own use. (That allegation wasn’t made public until Chism took his “creative accounting” story to the Southwest Times Record in Fort Smith.)

None of this looks remotely like the kind of balance sheet surgery in which Enron engaged, but any accounting sniffle these days is suspected of being a case of the Enron flu. No wonder, then, that Superior’s announcement was carefully worded to leave the impression — while not actually saying — that the accounting decisions under review were those of the guy who had been fired. It will be interesting to see whether Superior restates its third-quarter earnings in line with what Chism said he recommended all along.

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It’s still hard to admire the production-line law firms, especially those engaged in class-action lawsuits that generally benefit the lawyers infinitely more than they do the members of the plaintiff classes. But you have to hand it to Steven “Gene” Cauley — the Little Rock lawyer whose firm, Cauley Geller Bowman & Coates LLP, specializes in suing public companies on behalf of shareholders — for being in the right business at the right time.

And Enron has made a comment Cauley made to Arkansas Business last year seem less hyperbolic: “Right now, we’re at the apex of financial fraud. Companies are not admitting fraud occurred, but they are admitting information in their financial statements is false.”

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The “dot-bomb” was a reminder to the investing public that the stock market is efficient — eventually — in rewarding only those companies that actually have the potential to make a profit. Enron has provided the same kind of wake-up call: Eventually, even the cleverest of accounting tricks will be unable to disguise the fact that more money is going out than coming in.

The American economy is starting to pull out of the 2001 recession even without a stimulus package from Congress. Tax cuts, September 11 and the ensuing war on terrorism already have wiped out the federal budget surplus, but inflation is in check, interest rates are at historic lows and the unemployment rate in Arkansas and nationwide has crept up to levels that just a decade ago seemed impossibly low. The nation’s economic foundation is remarkably sound.

Enron and the bursting of the dot-com bubble may, then, contribute to even stronger, sounder, more efficient and reliable financial markets. But it’s probably too much to hope that capricious investors will actually start looking past the next quarterly report.

Gwen Moritz is editor of Arkansas Business. E-mail her at [email protected].