Shock waves from the collapse of United States energy giant Enron have reached New Zealand – prompting funds managers to more carefully investigate the finances of companies they’re thinking about investing in.
Enron’s bankruptcy, despite its accounts getting a clean bill of health from auditors, has made funds managers more sceptical about audited financial accounts, says BT Funds Management chief investment Craig Stobo.
Analysts traditionally base much of their valuation work on companies’ accounts, says Stobo.
"But this has shown that you can’t rely on the numbers at face value, even when they’ve been audited."
BT now has less confidence in using audited accounts to calculate a company’s worth than it did before. Its analysts are now doing additional work to test the quality of the accounts.
"You’ve now got to go behind the numbers to see how they are compiled, and this involves interviewing the managers responsible for them."
Funds managers already routinely question audited accounts and make their own assessments about a company’s financial health, he says.
Enron’s collapse has shown the importance of this work and underlines the need to question companies more closely.
"Things like goodwill, extraordinary items, underlying cash flow, off balance sheet items – all those things will be focused on more fully. Where you aren’t satisfied with the company’s answers you should be very careful about buying."
BT didn’t own any Enron shares.
"This highlights the benefits of having good analysts going through company accounts and being wary of hype. Enron was one of those energy-trading companies touted as part of the new investment era. But to us it felt more like an 80’s investment company."
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