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Enronitis, witch-hunts and financial hypochondria

Enronitis is spreading fast. How virulent it proves to be, and how quickly the contagion can be contained, is anyone's guess. But its chief symptom - the fear that companies have been systematically misrepresenting their accounts through off-balance-sheet financing, special purpose entities and minimal disclosure - will not be easily suppressed. US regulators hope a fresh dose of rules will provide a remedy. Others say more rules will only mean more loopholes and that what is needed is a complete overhaul of the requirements for company reporting, auditing, governance and analysis worldwide. Only then can confidence in the system be restored, they say.

Krispy Kreme wasn't at the top of many lists of companies most likely to get caught in the accounting fallout from Enron's collapse. But its experience in mid-February offered a near-perfect demonstration of Enronitis at work.


The Winston-Salem, North Carolina-based doughnut maker is an all-American success story. It has been selling its popular range, headed by the signature Hot Original Glazed, to the snackers and dunkers of north America since 1937. It sells 5 million doughnuts a day and is busily opening new stores in the US and Canada to satisfy burgeoning demand: 48 last year, an estimated 59 this year.


In the past two years the company has become a Wall Street favourite as well - with its shares rising 400% since its IPO in May 2000 to just under $40.


Little seemed to be clouding management's outlook until February 11, when the tabloid New York Post published a full-page article on off-balance-sheet financing. The report may not have caused the average New Yorker to choke on his or her Powdered Blueberry-Filled or Glazed Sour Cream doughnut that morning. In business terms, though, its effect was toxic.


Picking a company familiar to its army of readers to illustrate its somewhat dry subject, the Post targeted "the Krispy Kreme doughnut folks" - pointing out that the company was using a synthetic lease arrangement "to make an entire doughnut factory disappear".





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