The Number: How the Drive for Quarterly Earnings Corrupted Wall Street and Corporate America [Hardcover]

Alex Berenson (Author)

Book Description

Publication Date: March 4, 2003

In this commanding big-picture analysis of what went wrong in corporate America, Alex Berenson, a top financial investigative reporter for The New York Times, examines the common thread connecting Enron, Worldcom, Halliburton, Computer Associates, Tyco, and other recent corporate scandals: the cult of the number.

Every three months, 14,000 publicly traded companies report sales and profits to their shareholders. Nothing is more important in these quarterly announcements than earnings per share, the lodestar that investors—and these days, that’s most of us—use to judge the health of corporate America. earnings per share is the number for which all other numbers are sacrificed. It is the distilled truth of a company’s health.

Too bad it’s often a lie.

The Number provides a comprehensive overview of how Wall Street and corporate America lost their way during the great bull market that began in 1982. With fresh insight, wit, and a broad historical perspective, Berenson puts the accounting fraud of the past three years in context, describing how decades of lax standards and shady practices contributed to our current economic troubles.

As the bull market turned into a bubble, Wall Street became utterly focused on “the number,” companies’ quarterly earnings. Along the way, the market lost track of what companies are really supposed to do—build profitable businesses with sustainable futures. With their pay soaring, and increasingly tied to their companies’ shares, executives were more than happy to give Wall Street the predictable earnings reports it wanted, what-ever the reality of their businesses. Accountants, analysts, money managers, and individual investors played along, while the Securities and Exchange Commission found itself overwhelmed and underequipped to cope with the earnings game.

The Number offers a unified vision of how today’s accounting scandals reflect a broader system failure. As long as investors remain too focused on the number, companies will find ways to manipulate it. Alex Berenson gives anyone who has ever invested in—or worked for—a public company the tools necessary to see beyond the cult of the number, understand accounting and its limits, and recognize patterns that can lead to fraud. After two decades of stock market hype, The Number offers a welcome dose of truth about the way Wall Street and corporate America really work.

Editorial Reviews

From Publishers Weekly

(Starred Review) In the wake of Enron's spectacular implosion, the scandals surrounding the collapse of Tyco's stock price and revelations that WorldCom inflated its earnings by $9 billion, many wonder how independent auditors could have overlooked such huge discrepancies in financial records. Others ask how the SEC failed to spot corporate fraud and errors of the accounting firms on such a scale when reviewing the annual reports. New York Times reporter Berenson provides eye-opening answers to these and other equally disturbing questions in this hard-hitting and well-documented study. Against a background of the decline in independent investment research and the shift in client base for investment houses from individual investors to corporations, he charts the ascent of earnings per share-"the number"-to measure companies' health. As stock options became a major element in executive compensation and the consulting role of audit firms increased while the SEC neglected to pursue fraud on any major scale, Berenson argues, corporate executives' motives to manipulate "the number" met with a perfect opportunity to defraud unsuspecting investors, and many couldn't resist. His coruscating portrait of the boldness and reach of corporate fraud over the past five years is a clarion cry for reform. But his discussion of the SEC's shortcomings-due to lack of staff and budget in 2001, it could audit only 2,280 of the 14,000 annual reports received and has investigated a mere fraction of all allegations of fraud in corporations-shows the agency, created to protect investors from exactly what's happened, in the direst state of emergency.
Copyright 2003 Reed Business Information, Inc.

Review

Advance praise for TheNumber

“This will surely be the most important financial book of the year. Every CEO, CFO, CPA, broker, money manager, and congressperson in America will want to read it—that’s a given. But plain old investors will, too. ‘So that’s what happened to my 401(k),’ they will say.” —Andrew Tobias, author of The Only Investment Guide You’ll Ever Need

“The Number is number one. A first-class account of how the 1990s got that way.” —James Grant, editor, Grant’s Interest Rate Observer

See all Editorial Reviews

Product Details

• Hardcover: 304 pages
• Publisher: Random House; 1 edition (March 4, 2003)
• Language: English
• ISBN-10: 0375508805
• ISBN-13: 978-0375508806
• Product Dimensions: 9.7 x 6.3 x 1.1 inches
• Shipping Weight: 1.2 pounds
• Average Customer Review: 4.2 out of 5 stars  See all reviews (24 customer reviews)
• Amazon Best Sellers Rank: #1,189,823 in Books (See Top 100 in Books)

More About the Author

As a reporter for The New York Times, Alex Berenson has covered topics ranging from the occupation of Iraq to the flooding of New Orleans to the financial crimes of Bernie Madoff.

Customer Reviews

Most Helpful Customer Reviews

22 of 24 people found the following review helpful:

4.0 out of 5 stars I've got your number, sunshine, March 3, 2004

By 

O. Buxton "Olly Buxton" (Highgate, UK) - See all my reviews
(REAL NAME)   

This review is from: The Number: How the Drive for Quarterly Earnings Corrupted Wall Street and Corporate America (Hardcover)

In the last few months I have read four accounts of the tech bubble. Glutton for punishment, aren't I. I've just got through Alex Berenson's "The Number". I was sent a free copy by the publisher. Alex Berenson himself emailed me to arrange this. So first up, in the spirit of full and fair disclosure, I disclose that I was given this book to review. I feel the need to say that especially in this case because I thought this was rather a good book. By some margin the best of the bunch, actually.

Where Roger Lowenstein's "Origins of the Crash" had the air of being something of an aggregation of newspaper clippings, and Frank Partnoy's "Infectious Greed" was less focussed, less penetrating, and in no real sense dispassionate, Mr. Berenson clearly sets out his stall with an interesting (and relevant) history of the regulation of corporate governance and reporting since the 1920s, and an analysis of the issues associated with accounting of any sort. In two short but clear appendices, Berenson explains in lay terms the difference between (and pros and cons of) accrual and sale accounting, and then balance sheets as opposed to income statements. These are fundamentals that one needs to understand what was going on, and not all of the authors who have written on the subject necessarily have a grasp of them.

Where as other authors have targeted (with varying degrees of persuasiveness) bodies such as ISDA, the SEC and the credit rating agencies as the main culprit, Berenson's focus stays very much with the auditing accountants and the corporate executives. A number of sectors in the financial system (in fact pretty much all of them) took their eye off the ball at the critical stages of the bubble, but were it not for the vagaries and flexibilities of accounting policy and sheer out-and-out greed of executives, this might not have happened, at least perhaps not quite so dreadfully. Berenson is convincing on both these scores.

That said, I don't subscribe to all Berenson's views. While the actions of some auditors (notably Andersen) are indefensible, Berenson supplies a pretty solid excuse for the profession generally: the preparation of company accounts, he notes, necessarily involves hundreds of assumptions, approximations and best guesses, and as even with the best will in the world these can be wrong, and "those who want to cheat have an almost infinite number of ways to do so". Given that the auditing function can only cost so much before it drives a company out of business by itself, there must be limits to what any auditor can be expected to detect. But Berenson still holds the profession to book. This isn't always consistent with Berenson's other view, which he expresses convincingly, that the "number" is intrinsically unreliable and should be much less of a determinant for market sentiment than it currently is. On the other hand, as he notes in his conclusion, even this view has its limits: the stagnation of the Japanese markets in the last five or so years is testament to the perils of ignoring the "number" altogether.

Like most financial authors (with the exception of Michael Lewis, for whom he has considerably less respect than I have) Berenson favours more government regulation as part of the solution to the problem: Congress could limit the number of options companies could grant their CEOs or put restrictions on executive pay, he suggests. Perhaps accountants could be required to bid for audit work to a federal board.

With respect, this is silly: Irrespective of how ridiculous executive compensation may be (and Berenson is certainly convincing that it is), such a Soviet technique is absolutely the last thing that is required. The market has to learn these lessons and discount the stock of profligate companies itself: the government has no means (let alone resources: Berenson is similarly persuasive as to the lack of funding for the SEC) for ascertaining what is reasonable, whereas the market - albeit eventually - will find the charlatans out. I dare say Michael Eisner is finding this out to his discomfort at the moment. At some point short sellers will be able to exploit the arbitrage opportunity. Investors may lose in the short term, but if you aren't able to take a short term loss, you shouldn't be in the market. Like Partnoy does, Berenson concludes his book with recognition of this. Caveat Emptor, indeed. In some ways having the SEC as a comfort blanket for investors in itself fuelled the boom.

Elsewhere Berenson is occasionally guilty of sophistry. He points out the irony of price regulation of the commissions charged for trading on the NYSE, perhaps the most potent symbol of the free market on the planet. But then mixes his examples: "Wall Street has always loved free markets, except when they might cut into its fees. Today, when even real estate agents are being forced to compete on price, the 7 percent commissions charged by big investment banks for initial public offerings are sacrosanct." This is naughty, and I suspect Berenson knows it. Commissions for underwriting IPOs are quite a different thing to commissions for brokering stock sales across the exchange. They have never been subject to any regulation, and if the fees tend to stick at a certain level, that not so much to do with price fixing, as the inherent risks and huge amount of work and expense required to get an IPO away. That is the market level. Given the dearth of IPOs in the last three years, the pitching for them will have been feverish.

I am prattling on. These quibbles are largely that: just quibbles, and in the round this would be the book I would recommend out of the four on the subject I have recently read.

21 of 24 people found the following review helpful:

5.0 out of 5 stars Every investor should be forced to read this book, January 16, 2004

By 

mark cuban (dallas, tx USA) - See all my reviews

This review is from: The Number: How the Drive for Quarterly Earnings Corrupted Wall Street and Corporate America (Hardcover)

I get asked all the time to write a book about business and investing. Fortunately, I dont have to or want to any longer. The Number is the book about investing I would write. Its not a how too book, its a book that pulls back the covers on Wall Street and shows once and for all that it is not an efficient market, and that indivudal investors and fund managers need to know that they are walking into a world that is far more ponzi scheme than a source of capital for growing companies and returns for investors.

If you buy stocks without reading this book first, you are putting yourself at a disadvantage

12 of 13 people found the following review helpful:

5.0 out of 5 stars Insightful and easy to understand, March 12, 2003

By 

Ari Sakoyan (Illinois) - See all my reviews

This review is from: The Number: How the Drive for Quarterly Earnings Corrupted Wall Street and Corporate America (Hardcover)

I am a professor of finance and economics and must recommend this book for anyone with even a basic interest in corporate markets. I've asked my students to read The Number largely because it presents a fair and in-depth perspective on this fascinating economic fallout without ignoring the historical context. Berenson writes clearly and perceptively while analyzing from both top to bottom as well as left to right the market growth and its subsequent implosion.