Cooked books

A balance sheet is a photo of the company. And a photo can be retouched.

Accounts say three things: what the company owns, what it owes, and what it earns. Four giants lied about one of them.

Enron, in Texas. In the late nineties, it was one of the most admired companies in America.

Its secret: hundreds of separate companies, created to house debts and losses off its balance sheet.

On paper, Enron looked rich and lightly indebted. In reality, it carried billions of hidden debt.

In December two thousand one, it went bankrupt. Its share was worth over eighty dollars a year earlier. It became almost worthless.

Its auditor, Arthur Andersen, one of the five biggest firms in the world, vanished in the storm.

WorldCom, two thousand two. The telephone giant had an even simpler trick.

Ordinary costs, which should have reduced profit, were filed as investments, as if they were machines.

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Say one hundred million of costs. Counted normally, they wipe out one hundred million of profit in the year.

Filed as investment and spread over ten years, they only wipe out ten. Profit looks inflated by ninety million.

At WorldCom, an internal auditor, Cynthia Cooper, discovered the hole. It ended up exceeding ten billion dollars.

Parmalat, in Italy, late two thousand three. The dairy giant showed nearly four billion euros in an account in the Cayman Islands.

The bank replied that this account did not exist. The document was a fake. In total, the hole reached about fourteen billion euros.

Wirecard, in Germany, June two thousand twenty. An online payments champion, a member of the main German index.

The auditors looked for one billion nine hundred million euros, supposedly sitting in accounts in the Philippines. Nowhere to be found.

A week later, Wirecard declared itself insolvent. It was the first company in the main German index to fall this way.

The most troubling part: journalists had been warning for years. The German regulator had even filed a complaint against them.

Four stories, one lesson. A profit can be dressed up. Money actually coming in, much less so.

First signal: a company announces big profits, but its cash does not follow.

Second signal: structures so complicated that nobody can explain them simply.

Third signal: those who ask questions are attacked, instead of getting answers.

For you, the best protection remains the most ordinary: never put a large part of your savings in a single company.