Businesses succumb as 'Enronitis' becomes epidemic

Elan shares were battered on Wall Street yesterday, but the pharmaceuticals company was not the only one caught up in a post-Enron crisis of confidence affecting corporations with complicated accounting problems. From Conor O'Clery, International Business Editor on Wall Street.

Another casualty was Tyco International, a US industrial and services conglomerate with $36 billion (€41.4 billion) in annual revenues.

Its share value plunged after the Wall Street Journal revealed that it spent $8 billion on 700 acquisitions in the last three years that were never announced to the public.

These upsets come against fast-moving developments in the Enron scandal, with the former head of the Houston energy company, Mr Kenneth Lay, refusing to appear before a Senate panel yesterday.

"Enronitis is clearly having an effect on shares of those companies that may have issues," said Mr Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson in Chicago.

"Up until the last week or two there was a belief that the US economy was soaring out of recession and that the recovery was going to be very strong. Now we are beginning to realise there are a great many weaknesses. As long as we have confusing accounting rules in place it makes it very difficult for people to have certainty about corporate finances and without certainty, price/earnings ratios will be lower because the trust factor comes into play."

Mr Henry Herrmann, chief investment officer at Waddell & Reed asset-management company, said: "Enron jitters, accounting jitters [are] spreading. It was Enron and is now drifting into Elan and Tyco.

"The silver lining is that there will obviously be a revamp in financial reporting," said Mr Denis Curran, director of Bank of Ireland asset management in Greenwich, Connecticut. "All financial stocks fall when asked to restate their balance sheet. People are running scared and everybody gets tarred with the same brush until the truth comes out."

Other companies under a cloud because of their book-keeping methods include K Mart, Global Crossing American Airlines, American International Group, Coca-Cola, Electronic Data Systems, General Electric, IBM and J.P. Morgan Chase. The closely-watched Moody's Investors Service has asked 4,000 firms for additional information about their accounting since the Enron scandal broke.

Last week Bank of America took great care to explain how a $418 million gain in the fourth quarter from a subsidiary set up last year to deal with problem loans resulted from tax savings after bad loans were transferred to the subsidiary. The full disclosure helped push the stock up 4 per cent.

Tyco split into four parts last month as a direct result of the Enron melt-down. Its chief executive Mr Dennis Kozlowski said he needed to reassure investors that its was not involved in risky accounting.

However, Tyco stock tumbled 24 per cent over accounting worries in the following weeks, and fell a further 13 per cent yesterday, despite assurances from analysts that it was not facing an Enron-type crisis.

The Dow fell steeply yesterday as investors ran scared. "There's no trust out there right now," said Barry Hyman, chief investment strategist at Ehrenkrantz King Nussbaum. "It's a question of which stock do you have in your portfolio that could be the next problem, so why be invested?"

In Washington the Senate Commerce Committee will vote this morning on whether to subpoena Mr Lay, after he failed to turn up at the Senate Commerce Committee on the grounds that he had already been found guilty.

Republican Senator Peter Fitzgerald said at the weekend : "Ken Lay obviously had to know that this was a giant pyramid scheme - a giant shell game," and Republican House Member Billy Tauzin, asked whether "maybe somebody ought to go to the pokey for this".

Senator Byron Dorgan, who would have presided over the Senate panel hearing, said that any comments by Senators suggesting criminal activity reflected assessments by Enron's own accounting firm, Andersen, that "possible illegal acts within the company" were committed.

Former Enron executives Andrew Fastow and Michael Kopper have also indicated they will refuse to answer questions from Congressional panels.

An Enron-authorised review of the company's partnerships published at the weekend suggested that multimillion dollar crimes were committed by executives who deliberately concealed financial information from investors.