Such an intense focus has been placed on quarterly earnings as an indication of a company’s success by everyone from analysts to executives that ethics have for the most part been thrown out the window, sacrificed to the all important number, i.e. earnings per share. This is the theory in Alex Berenson’s book “The Number: How the Drive for Quarterly Earnings Corrupted Wall Street and Corporate America.” This number has become part of a game to be played, a figure to be manipulated – beat the number and Wall Street all but throws a parade, miss it and a company’s stock may be abandoned. Take into account the incentives that executives have to beat the number and one can find plenty of reasons to manage earnings.
In the first part of “The Number” Berenson chronologically covers the history of the stock market from the Crash of 1929, the reform efforts of the 1930’s, the later regulatory efforts to establish standards for accountants and increase financial disclosure, to the 1970’s when the end of fixed commissions for brokers also meant the end of investment research, which was the source of knowledge for investors about the companies in which they were investing.
The second part then takes the reader up to and through the 1990’s, when stock options became the method of compensation for executives and when the number became the most important aspect of the quarterly financial reports. Berenson also leads the reader through the resulting cases of fraud and accounting sleight of hand when he discusses companies like Lucent, Enron, Tyco, WorldCom and Green Tree Financial. In addition, in this part of the book he discusses accounting firms, specifically the Big Eight, and the introduction of price competition among them as well as the transformation they made from accounting firms to service organizations, causing them to sacrifice independence for money. Part two ends with the bust that followed the late 1990’s and the paltry steps that were then taken by...
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