Demand Accountability from your Investments

Enron's demise last year hurt many people. There is some good that can come out of the affair, though. Naturally, a lot of people point to the retirement plan in place at Enron wherein employees stocked their accounts with Enron stock that was neither liquid (current employees could not sell those holdings) nor a hedge against risk (the large percentage dedicated to the stock unbalanced portfolios).

It remains to be seen whether the changes precipitated from this will be remain in the private sector (individual investors paying more attention to their own accounts and maintaining balance) or if the federal government will choose to interfere with how retirement plans are administered. My hope is that the private sector will learn from its own mistakes without costly regulation hampering the system.

Another ray of hope comes from Arthur Andersen falling into the mess. This has the potential to be extremely beneficial. Auditors perform a much needed task for investors - they go over the books and keep the companies honest. Individual share holders have neither the time nor expertise to do this themselves, so they rely on anaylsysts and auditor to keep companies accountable.

Analysts have long since lost credibility. Even without unbelievable shills like Mary Meeker running around, the bulk of analysts are simply unable to downgrade a stock. The word "sell" is not in their vocabulary, and they take every opportunity to use euphamisms instead of that four letter word. "Source of cash" is particularly laughable.

So this leaves auditors. Unfortunately, because so many of them run lucrative consulting businesses, the auditing becomes a sideshow. The firm's interest is not to protect investors, but to keep consulting clients happy.

There are all kinds of suggestions for how to keep the auditors auditing, including separating them from their consulting businesses, and forcing companies to rotate auditors every five years or so to keep things from getting chummy. Thos emay help, but again, I don't like regulation.

The best thing that could happen is if the investors out there start pummeling the stocks that hide their numbers.

I hear you out there, pointing out that, as I mentioned above, individual investors do not havethe time or expertise to sniff out the frauds. True. But there is one clear measure of a company's performance that is difficult to hide: dividends.

Dividends have fallen out of favor, as companies instead prefer to use cash to buy back shares for both executive stock options and to boost their own price. But that looks to me like a few sources of shady bookkeeping right there. Investors need to demand that companies use their cash to grow the business, or return it to them in the form of dividends. The shell games must cease.

Paying out a dividend gives an investor a clear means to look at their return on investment and compare it to other companies in the marketplace. Dividends also allow the market to determine how excess capital should be allocated by returning a good portion of profits back to the financial marketplace.

So if the Enron scandal has you nervous, and you want to know what to dump, look for the last time the board gave you a reason for confidence in the form of a check. Millions of investors dumping companies that don't return their profits ought to keep companies accountable. Auditors and analysts be damned.