Enron: The Watergate Of Financial Services
The ripples of the Enron collapse have shaken investors‚ confidence in the stock market and the believability of corporate earnings–creating a Watergate-like crisis in the financial services industry, according to a new study. But Enron apparently hasn‚t caused investors to doubt the stocks of the companies for which they work.
The survey of 363 investors found that 43% have less confidence in the market in the wake of Enron, yet at the same time, 70% say they are comfortable with the amount of their company‚s stock they hold in their retirement plans.
Only 19% of respondents in the TowersGroup survey say they would prefer to hold less company stock, while 9% say they want to own more.
Respondents were much more distrustful of the market and Enron. Indeed, 88% say they believe Enron‚s executives, board of directors, auditors or attorneys intentionally misled investors about the company‚s financial condition.
Only 23% expressed a strong belief in the stock market‚s ability to fairly value stocks. But 33% do believe that investment information will become more reliable as a result of the Enron collapse, compared with 27%, who are less confident about such information.
"Enron‚s blow to investor faith is the Watergate of business," says Alan Towers, president of TowersGroup. "Trust will no longer be assumed. Companies will have to earn it with behavior, communications and leaders that inspire confidence."
Some financial advisors report that the Enron affair has shaken clients‚ confidence more than any single event in recent decades, including the 1987 stock market crash, the 1998 Asian crisis and the bursting of the Nasdaq bubble in 2000.
"I‚ve received more calls about Enron than any other event in my career," says Susan John, an advisor in Wolfeboro, N.H. Her clients include current and retired businessmen who always viewed the Big Five accounting firms with great respect.
Financial advisors, however, can take solace from that fact that they remain among the more trusted of financial professionals. The survey asked investors to rate the honesty and integrity of financial professions on a scale of 1 to 5, with 5 being the highest. The groups with the highest (4 and 5) scores were bankers, with 39% in that range; mutual fund companies, 38%; and financial planners, 37%.
Despite the accounting irregularities tied to the Enron scandal, accountants ranked right behind planners, with 35%. Leading in the 1- and 2-score rankings were stock brokers, 36%; senior management of publicly traded companies, 36%; and boards of directors of publicly traded companies, 34%. Security analysts received mixed reviews, with 29% giving them a 1 or 2, 21% giving them a 4 or 5, and 42% giving them a 3 ranking.