Any doubt that fallout from the collapse of energy giant Enron — which crumbled under the weight of a massive accounting scandal — would reach the world of e-commerce was put to rest about two weeks ago.
Just a week after Amazon.com (Nasdaq: AMZN) drew cheers from Wall Street by reporting its first profit, the e-tail giant found itself answering questions about its cash position. Those concerns arose after media reports cited a footnote in an Amazon regulatory filing that showed part of the company’s cash holdings were pledged to secure real estate leases.
The vast majority of analysts rushed to defend Amazon, and several noted that the accounting practice in question is commonplace. But the issue clearly hit home with many investors, who sent Amazon shares tumbling nearly 10 percent in a single day.
“Everything is getting a lot more scrutiny due to Enron,” Morningstar.com analyst David Kathman told the E-Commerce Times. “Any kind of accounting question really gets people’s attention.”
While nothing can compare with the scale and media attention that Enron has received, the e-commerce industry has stumbled over its own accounting slip-ups in recent weeks.
Homestore.com (Nasdaq: HOMS), which late last year announced it would restate 2001 earnings, said last week that it also will revisit how revenue was accounted for in 2000. Trading in the stock has been halted twice in the past two months by Nasdaq, but even that has not kept Homestore shares afloat. The company’s stock price has plunged from more than $35 to less than $1.
Hoping to distinguish between past practices and what he said are the company’s upbeat prospects, Homestore CEO Mike Long said in a statement that past “accounting issues do not affect the ongoing operations of Homestore.”
According to experts, however, many investors will not make such a distinction. Instead, they will steer clear of companies whose accounting practices make them the least bit nervous.
“Investors are going to become even more skeptical,” David Schultz, a professor of management at Hamline University in St. Paul, Minnesota, told the E-Commerce Times.
That may be especially bad news for companies in the e-commerce industry, which saw stock prices rise dramatically long before earnings followed.
“Given how well e-commerce stocks performed until recently, with growth often unbelievable, many will perhaps think that the numbers were, in fact, inflated or doctored and therefore may worry that there is more trouble ahead for them,” Schultz said.
Meanwhile, experts also said the nature of Internet businesses may subject them to additional scrutiny, since partnerships are common and often involve barter deals or other non-cash transactions.
Eventually, that concern may spill over from investors to the general public, causing consumers to start avoiding companies they are not fully comfortable with when it comes to doing business online.
“Investors are already pulling back, and they and the public in general [are] suspicious of accounting practices and business ethics overall — justifiably so,” Patricia Sendall, a professor of management at Merrimack College in Andover, Massachusetts, told the E-Commerce Times.
E-commerce companies contacted for this story, including EBay (Nasdaq: EBAY), Monster.com and Amazon.com, either declined to comment or said they have no plans to change their accounting practices in response to the Enron scandal.
Several companies also noted that they already follow or exceed the guidelines of Generally Accepted Accounting Principles (GAAP) when they report earnings. They added that they will quickly comply with any changes in regulations.
Regulators have made it clear that they plan to do their part to revive public confidence in publicly traded companies.
The U.S. Securities and Exchange Commission (SEC) already has announced a planned series of steps to upgrade financial reporting standards. SEC Chairman Harvey Pitt said these moves will pave the way for “further reform.”
Sendall and others said that while accounting practices eventually will be altered in response to the Enron debacle, those changes will take time. Until changes are implemented, smart companies may need to be more aggressive in winning back investor and customer trust.
“E-businesses are going to have to perform several tasks to reinstate confidence,” Schultz said. “They will probably want to beef up their audit teams, perhaps with more outsiders, to show they are serious about fair audits. They may need to be more careful about whom they select as outside auditors and inform investors those auditors are not also paid to consult.”
Sendall said corporations that do the bulk of their business online may have an advantage when it comes to reaching out to reassure the public.
“Companies might consider posting to their Web site precisely what their accounting practices are,” Sendall said. “They need to express to their investors and to the general public that they are aware of concerns, given the Enron scandal. With that in mind, they can show that they have nothing to hide. Companies need to be proactive with the public to rebuild trust.”