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Waiting for the next shoe to drop
graphic February 1, 2002: 6:22 p.m. ET

We made it through earnings season mostly unscathed. But the release of audited statements in coming weeks could lead to a world of hurt.
By Adam Lashinsky
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SAN FRANCISCO (CNN/Money) - The disturbing question on everyone's mind these days has a frighteningly simple answer. Will there be another Enron? Yes, of course, there will be.

The more tantalizing questions: Who will be next to crack, and when will we find out? The identity of the next Enron is tough to know. Short sellers will speculate, of course. But disasters like Enron tend to explode like bombshells, meaning that everyone but insiders will be surprised when the cataclysm occurs.

The "when" is easier to discern. In coming weeks, as companies begin to file their 10-K annual reports with the Securities and Exchange Commission, the next wave of revelations will hit the market. It stands to be ugly. The reason lies in what auditors will force their clients to disclose in return for signing off on their annual reports.

"The interplay of the relationship between issuers (of stock) and auditors for every public company this year will occur under the cloud of Enron," says Boris Feldman, a litigator with the Silicon Valley law firm of Wilson Sonsini Goodrich & Roasati. "Every auditor in America is having a near-death experience," he says.

With Enron's auditor Arthur Andersen in mind, no firm wants to find itself in similar straits. The result: "There will be either adjustments or restatements (to past year's results), or, more likely, a very high level of detail in the footnotes," Feldman.

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    In other words, the public accounting firms, in order to cover their backsides, will make sure everything that might possibly need to be disclosed will be disclosed in this year's crop of 10-K's, which are required to filed by 90 days after the end of the fiscal year (that is, by March 31).

    Every off-balance-sheet deal, every nuance of financial engineering, every related-party transaction. Where once these references were vague, this year the descriptions will be specific. Anything less would expose the auditors.

    Don't be surprised to find that companies you thought had great earnings in years past -- supporting still-high P/E ratios -- confess that past results weren't so great after all.

    A heads up on Hewlett-Packard...

    This week, Compaq made news for giving a relatively bullish outlook for 2002. Then the European Union granted its approval for the HP-Compaq merger to proceed (see more). Will Carly Fiorina have another pleasant surprise for investors when she speaks to the Goldman Sachs technology conference in Palm Springs, Calif., Monday at 7 a.m.? Note that HP's fiscal first quarter ended Thursday Jan. 31. HP is scheduled to report earnings Feb. 13.

    Imagine the momentum the deal would receive if Fiorina took the stage in Palm Springs and pre-announced a better-than-expected quarter? Wall Street expects HP to report earnings of 16 cents per share, or about $310 million. For the week, HP's shares were off 2 percent, closing at $22. Compaq's shares ended the week up 1 percent, at $12.10.

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