Asia not infected by earnings 'virus'


Schilit says he regrets not following up on his call that Enron had reporting problems in the 1990s

By Alex Frew McMillan

HONG KONG, China (CNN) -- Asian companies often have cleaner books than their U.S. counterparts, two experts say.

But the risk of another Enron Corp. disaster is still strong.

"It looks like the pro-forma virus hasn't infected the Asian business community, as it has in the U.S.," consultant John May told reporters at an investor conference in Hong Kong.

Pro forma earnings are company-generated alternatives to earnings prepared under generally accepted accounting practices.

May expressed similar concerns over pro-forma earnings in a report he developed for investment bank CLSA, which the bank released at its conference.

Schilit regrets Enron call

Howard Schilit, president of the Center for Financial Research & Analysis (CFRA), told CNN on Thursday that he regretted not targeting Enron Corp. as a failure earlier.

"Absolutely," Schilit told News Biz Today, when asked if he regretted not following up on his 1995 warning that the company had financial irregularities. "The first signs that they had problems were in the 1990s."

He said Thursday that he noticed trouble when Enron started changing its model from being an operating company to being an investment company.

"We noticed that a lot of their profits were coming from investment gains, and that's never a good sign," he said.

Schilit said fear and greed often keep market players from voicing their concerns, however.

Enron tragedy lurks

In a briefing after a closed CLSA session, May and Schilit often referred to the failed energy company and their accountants Arthur Andersen.


Mobius, who broached the topic on a panel last year, has criticized the independence of boards in Asia

Schilit, who calls himself a "pathologist" for failed companies, said the tragedy in Enron is that Arthur Andersen will likely disappear.

Rival accountants will win their clients and take their employees, Schilit said, when in his eyes accountants are the same.

Schilit plans to start a CFRA service in Asia. He said on Tuesday he will roll out reports within the next 60 days on companies in greater China, South Korea and Japan.

This is his first visit to Hong Kong. Both he and May said they are studying Asia but have not scrutinized balance sheets and income statements.

Asia often criticized

Asian companies are sometimes criticized for lax accounting, not least by then-Arthur Andersen CEO Joseph Berardino (full story).

But May conceded that U.S. companies have bigger problems than previously realized. He said the cost of options granted to executives is a major concern.

One fund manager told CNN on Thursday that derivatives and options are a bubble waiting to burst in the U.S. stock market.

May is also concerned with company retirement plans. U.S. companies are too optimistic in their forecasts, he said, with some 65 percent estimating returns of 9-10 percent on stocks.

Asia not overconfident about retirement

By contrast, he said, investor Warren Buffett considers 6.5 percent annual gains a reasonable target.

Though the issue is a dry one, May said, a 0.5 percent change in forecasts can mean $500 million to the bottom line of General Electric.

Asian companies do not have such severe issues surrounding options and retirement plans, May and Schilit agreed. They said Asia may still have its own Enron Corp., though they cannot identify it yet.

Schilit's main concern with Asian companies is the lack of independence of their boards, often cited by influential investors, including Templeton chief Mark Mobius (full story).

American companies have a much better track record of hiring outside directors, while Asian companies sometimes cling to directors with conflicts of interest.