Cooking the books
In the wake of Enron, WorldCom and ImClone, the corporate annual report may be one of our finest contemporary works of fiction
I had to admit, things were looking great for the energy company. I flipped open its annual report and read a catalog of confident, upbeat news. Revenues in the last year had zoomed up by 28 percent, cracking a record $40 billion. “Our position as No. 1 in multiple energy markets,” the top execs wrote in their letter to investors, “grew so strong that it no longer is challenged by any single competitor.”
I read on; the fat, glossy document was crammed full of pictures showing happy workers gesturing excitedly at desktops and barking into phones, perky blondes confidently leading meetings. And then, in one magnificent full-page spread, the top three executives appeared in their shirtsleeves, arms akimbo, smiling with quiet pride at their investors. “Give us your investment money, and we’ll make you rich,” is what a photo like that is saying to you. “We will remain,” the executives crowed, “the world’s leading energy company.”
Except, of course, the company was Enron. And this was their 1999 annual report.
So, in reality, the company’s financial position was beyond horrific. Revenues were not, in fact, exploding. Actually, the company was building up cosmic amounts of debt and concealing it with some of the most creative book cooking in the history of finance.
Among other things, Enron was logging the revenues from decade-long contracts as single-year sales. The illusion of ballooning profits pumped the stock higher and higher—and then, just before the scam began to unravel, top executives dumped their stock, raking in more than $500 million in personal profits. And we all know what happened next: Enron stock collapsed from $80 to about 17 cents, and everyday investors took it in the shorts. Rarely have senior executives so blatantly and cynically lied for their own profit.
“What we found,” marveled a federal investigator who looked through Enron’s files this spring, “was appalling.”
All of this makes Enron’s old annual reports weirdly fascinating to read. You look back over those radiant, upbeat documents of conquest, and suddenly all the potboiler turns of phrase seem positively ominous. “Enron is moving so fast that sometimes others have trouble defining us,” one passage coyly notes. Even its most numbly recited nostrums about the digital world, such as “We are participating in a New Economy, and the rules have changed dramatically,” seem pregnant with meaning. When you look at it with 20/20 hindsight, the corporate annual is like a Rosetta stone, a little codebook of corporate deceit.
“What you own,” as the Enron heads conclude in their letter, “is not as important as what you know.”
We are accustomed to the corporate world bending the truth. This is not news. But, in recent years, so many corporate reports have borne so little relationship to reality that they’ve gone beyond mere hyperbole. They might as well be filed in the science-fiction shelves of libraries.
In the last five years, the number of public companies that have “restated earnings”—essentially admitting they’d cooked the books—has exploded, more than doubling from 116 in 1997 to 270 last year. In strictly objective terms, corporate mendacity is one of the few boom industries left.
All this makes corporate annual reports an intriguing artistic subfield: The literature of lying through your teeth. Take your pick of the biggies: Xerox, Enron, Global Crossing, Qwest. They’ve all faked their revenues and dissembled to investors, while producing gorgeous four-color documents that never acknowledge any of this larceny.
Indeed, the whole point of corporate reports is to paint the corporation as a plainspoken, down-to-earth bunch of regular Joes and Janes. It’s a tricky balance. You need to appear to have savvy enough to manage gazillions of dollars in investors’ money, yet you need to be possessed of a Forrest Gump-like quality—the folksy vibe of the Everyman. It is, as Enron intones in its final pages, all about integrity: “We work with customers and prospects openly, honestly and sincerely.”
As a result, in the corporate annual report, the visual image rules the roost. After all, text and balance sheets can be scrutinized for inconsistencies. But a shot of the CEO with his sleeves rolled up—there’s no standard for truth there. Few publications lavish more obsessive attention on their photography. As a business writer, I regularly run into photographers who make unbelievable wads of dough doing shoots for corporate reports. “Dude,” as one who also works for Details and Fortune told me at a party last fall, “the money is like nothing you’ve ever seen.”
There’s a historic tradition here, of course. Traditionally, creators of propaganda, such as wartime governments or the Catholic Church—the Church actually invented the term in 1622 (it’s Latin for “to sow” the faith)—always knew the importance of pictures. After all, up until the 19th century, most citizens of a republic or members of the church were illiterate; images were the only way to get stuff into their skulls.
Today’s annual reports rarely assume much more cognitive ability on the part of their audiences. “Most readers merely scan an annual report, but they do stop to look at the photos and illustrations,” as The Business Writer’s Handbook gently notes. “Do not … underestimate the importance of these photographs; all your reading audiences are interested in seeing what your company’s top executives look like.”
A crucial part of conveying this warm, fuzzy image is relying on the company’s one true connection to the little guy: the company’s employees. Focusing on the CEO, after all, eventually might force you to note that this guy used his insider access to lie deliberately about the value of the company and then make out like a bandit—like, say, Global Crossing head Gary Winnick, who raked in $735 million by selling his company’s stock just before it imploded. Or, you’d have to acknowledge the Olympian perks, such as the $18 million Manhattan apartment given to Dennis Kozlowski, the former head of Tyco, another artist of book-cookery.
No, it is far safer to focus on employees. Pages upon pages are bedecked with pictures of construction guys mired with mud, secretaries striding through the hallway with armfuls of papers, and scientists squinting at test tubes filled with mysterious green goo. And there is always, without fail, at least one picture of a black man or woman leading a meeting. Given that the directors of corporations are almost invariably white, these firms are palpably desperate to pose as diverse. The picture of a confident person of color leading a meeting is virtually a Jungian archetype.
The peak of this hilarious trend is undoubtedly the 2002 annual report of ImClone Systems. It devotes six massive layouts, illustrated with black-and-white photography worthy of National Geographic, to profiles of employees and their genuinely heartwarming commitments to cancer research.
“My father died of cancer when I was 20,” ImClone senior scientist Haijun Sun proclaims. “I personally experienced what a devastating disease it can be to both the patient and the family and how desperately patients need drugs that really work.”
More and more tales of everyday courage pile on: the young Latino girl fresh out of college and the attractive young Indian guy whose mother boasts that “her son is working on a cure for cancer.” If that isn’t enough, the company offers an enormous shot of Maria Prieto, ImClone’s Quality Control Supervisor, who not only lost her mother and her cousin to cancer but also is massively pregnant in her enormous photo. The heart bleeds; only a reader with a soul of stone could refuse to invest in this firm.
It’s almost enough to make you to forget the other family values at work here. Even as this report was being prepared, ImClone’s then-CEO Samuel Waksal was allegedly speed-dialing family members (to say nothing of his close friend Martha Stewart) and alerting them to secret insider news: ImClone stock was about to tank. The resulting frantic trading of these friends and family members, currently being investigated as insider action, netted them a cool $7 million, while leaving everyday investors holding the bag.
After reading about 50 of these reports in a weekend, I realized that the sci-fi analogy was weirdly precise. Like any piece of schlock genre fiction, annual reports rely exclusively on stock characters such as the paternal CEO; the brilliant young rising star; and the salt-of-the-earth, wise old janitor. It is mythic literature, telling us a brave and enormous tale, and, as such, it has little concern with the annoying particulars of reality. As Northrop Frye famously described romance literature, they talk about “what happens, not what happened.”
“In our opinion, the consolidated financial statements referred to above present fairly, in all material aspects, the financial position of WorldCom … in conformity with accounting principles generally accepted in the United States,” signed Arthur Andersen.
In every annual report, there’s one all-important page. Unlike the others, it’s entirely unadorned—no pictures of smiling employees gesturing at flat-panel monitors, no seizure-inducing color combinations, no bleeding-edge Russian-formalist experiments in typography. No, this page contains nothing but the letter from the auditor.
It is the company’s last and best assurance that the financial statements have been carefully checked and are true. And it’s always, always in plain, unadorned text. It is, in a way, the corporate report’s money shot—its most desperate bid for street cred, hence the plain type.
Smart investors know that because the rest of the report resembles a particularly delirious Nike ad, it should be taken with pretty much the same grain of salt. But a third-party audit is a somber piece of fact checking required by law, and the corporation delivers it in the most plainspoken way to show it truly means it.
It’s not unlike the phenomenon that Neil Postman once remarked upon in TV news. Everyday news is presented with spinning icons and heraldic music, not much different from the stuff that precedes a sitcom. This signals, on some level, that the news is really no more serious than, say, Friends. When a TV station actually has news to report, such as the president being shot or the World Trade Center collapsing, the station interrupts a broadcast with no fanfare at all—no music, no iconography. Plainspokenness is the ultimate token of veracity: This stuff is going to change your life. We really mean it.
And that leads us to the final, sorry core of today’s crisis in corporate honesty. Because—oops—it turns out that those auditors’ reports, so solemnly delivered, so legalistically precise, were themselves a load of codswallop. Arthur Andersen actually helped its clients figure out these Rube Goldberg accounting techniques, which is why Andersen was the auditor of choice.
Almost every corporation in this story used Andersen. Andersen, mind you, tried to argue that its techniques—including logging the mere movement of money from one account to another as earnings (tantamount to moving a dollar from your left hand to your right and calling it earning)—were perfectly legitimate. Thus, the meticulously hedged phrase “accounting principles generally accepted in the United States.” Under federal scrutiny, this facade crumbled, too, and with it vanished the hope of finding anything truthful in these tales.
But, in the literary world of our corporations, a good story may be the most important thing we come away with. “The truth," as Frank Lloyd Wright once wrote, “is more important than them facts."