Sarah's Financial Arrested Development Week 07 - Journal Review

Financial Arrested Development

After pulling a brain-muscle trying to wrap my head around Annual Statements, Financial Analysis and Enron, I emerged victorious, feeling a bit smarter, and at the same time flabbergasted!  The fact that Enron was able to conceal billions of dollars in debt and simply claim that like Coca-cola’s famous secret recipe, they simply did not share their business models - although being a publically traded company - is ridiculous.  As McLean stated, the fact that the company was so opaque was a huge red flag being waved furiously at the investors.  At the time I can only guess that people were willing to suspend certain warning signs, hoping to earn quick dollars and many of them did - both. 

Photo by Protohiro

The biggest change in perspective happened for me when Allen pointed out that Enron was one of the largest negatives in the country’s history, but also that the only place to go then was up.  He discussed how the Enron scandal reformed the financial reporting to be more immediate, more transparent. He mentioned that companies now are forced to do more relational marketing to regain consumer trust.  It remains to be seen if the people involved learned anything, but the people who were burned and those that witnessed it definitely did.

It also made me consider my arrested development with finances in that I never would have been smart enough to pull something like that off as numbers make my vision go blurry.  I wondered if there were other smaller companies who either a) truly don’t know how to balance a checkbook and always got by well enough until now or b) are not responsible to shareholders so they get as creative with their books as they want. The journal I chose to review was Private Company Due Diligence which not only identifies 5 different but very common financial issues, but also their suggestion for how to turn things around from the perspective of a potential company looking to buy such smaller companies. 

The Bluth family is the best example of the worst small-company practices.

 The most common themes reveal lack of structure and rules. This defines the first three issues in one.  In privately-held companies where 1) they make up the rules as they go along, they may 2) lack the structure to know who is eligible for what benefit, and 3) who enforces the rules and manages the money, and at the same time making decisions. 4) involves bad decisions such as putting value on inventory to reduce the amount of income taxes owed (Cohen, Kwestel, Freemen & Thornton, 2011) or 5) using too many deductions.

Sadly the decision on how to fix these often involves getting rid of the long-time employees who only “do things the way they’ve always been done” and undermine the efforts of the new higher-ups. Then, the other is to know your tax systems, create financial plans and be consistent when enforcing them. You can’t bend the rules for yourself when you are not allowed to for others. 

Despite my own financial arrested development, it’s taught me that tightening up and great attention to financial detail are empowering and it’s never too late to make a positive change. 

References:

Allen, C. (2002) Building Mountains in a Flat Landscape: Investor Relations in the post-Enron

  Era, Corporate Communications: An International Journal, Volume 7 (2), pp. 206-211.

  Retrieved from: http://libproxy.usc.edu/login?url=http://search.proquest.com.libproxy.usc.edu/
  url=http://search.proquest.com.libproxy.usc.edu/docview/903804543?accountid=14749

Cohen, C., Kwestel, M,, Freeman, T., Thornton, G. (2011, Nov). Private Company Due Diligence Mergers and Acquisitions, 46(11), 42-43.

McLean, B., (2006, January 19). Is Enron Overpriced? Retrieved July 22, 2011, from

  http://money.cnn.com/2006/01/13/news/companies/enronoriginal_fortune/index.htm

Peavier, R. (n.d.) Top 10 Financial Events of the Decade, About.com Guide. Retrieved

  from: http://bizfinance.about.com/od/currentevents/tp/Top_Ten_Fin_Events_Decade.htm