Rather than tread that road, however, I wish to scrutinize a different but related topic, namely, how some financial analysts have grown fat and lazy.  They either cannot or will not do their job, which is to read critically and in detail the financial statements of the companies they are examining and provide an objective research report on that business enterprise.

Enron is a perfect example.  A cash flow analysis of the 2000 10-K and the 2001 first quarter 10-Q would have revealed cash flow problems for Enron and would have suggested that the quality of earnings was rather poor.  Instead of digging deep into the Enron situation, however, most analysts were content to follow the herd down the long and winding road to destruction.

Let's also consider the article, "Auditors Failed to Warn in More Than Half of Big Bankruptcies" that appeared in the May 2002 issue of Bloomberg Markets.   In the opening paragraphs the author David Voreacos describes how Ernst and Young failed to qualify the audit of Loehmann's Inc., which declared bankruptcy in 1999.  Unfortunately, the author never tells us why Ernst and Young is responsible for predicting corporate failure, especially since many models exist that predict corporate failure.  Good analysts employ such models.

He goes on to cite case after case in which the external auditor did not flag the company because it might not be a "going concern."  He punctuates these illustrations with cries and moans from analysts and fund managers who claim that they never knew about the financial risks.  Give me a break!  What self-serving drivel by a bunch of professionals who aren't acting very professional!

For example, Voreacos mentions Bethlehem Steel Corporation.  If he had performed a literature search, he would have noticed that I predicted the failure of Bethlehem Steel in an interview with an Allentown reporter.  Not hampered by the auditor's unqualified audit opinion, I studied the data in the financial report and found the business concern in deep trouble.  In fact, I venture to say that any of my MBA students could have formed the same opinion.  It not only isn't rocket science, it isn't even high school science.  All it takes is some time and effort-and competence-to read the financial numbers to determine what they are telling you.

The most amusing case presented in the article by Voreacos concerns System Software Associates.  He lambastes KPMG because it signed an unqualified opinion for a firm that had serious troubles; to wit, "System Software disclosed the SEC investigation [because of earnings fraud in 1997] and reported two years of losses and a net worth of negative $73.6 million."  Instead of chastising KPMG, I would reprimand those analysts who read about a case of earnings fraud, two years of losses, and negative net worth and were so stupid that they still invested in the company.  Given that evidence, one shouldn't care too much what the audit opinion says.

Let's get real.  The job of auditors is to assure the investing public that the financial statements present fairly the results of the period.  Nothing else.  If they don't do this job, as with Arthur Andersen's audit failure of Enron, then it's ok to censure them for irresponsibility.  But let's not criticize the auditors for not performing the analysts' job.

Financial analysts have become like used car salesman.  Too many of them don't give facts and objective analysis; instead, they say anything to make a sale.  I am happy that some sunshine is finally being shone on the analysts.  Maybe the industry will clean up its act and start doing the work.

J. EDWARD KETZ is associate professor of accounting in Penn State's Smeal College of Business Administration.