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It's Not Enron, It's Facebook

NEW YORK ( TheStreet) - The phrase "When it rains it pours" seems to be the prevailing theme these days when discussing the current plight of social media giant Facebook (FB - Get Report).

As the stock continues to plummet from what was a $38 egregiously overhyped IPO price to where it sits under $20, investors have started to wonder if the company is the "house of cards" that Enron was discovered to be. Enron ultimately went to zero. Where is Facebook heading?

One of the things that has made Wall Street seem a scary place is that corporations have become highly skilled at pretending to be something they are not. It goes without saying that there is no better example of this than Enron, but is it fair to place Facebook in this category? Some investors have already taking it to Twitter and in the comments section of several articles. But is it fair?

As far as the comparisons are concerned, for Facebook, not only is it in a continuous cycle of defending the fundamentals of its business, but there are now growing concerns about the legitimacy of its 955 million user base. Investors want to know if they are real or if the company has been lying.

As Enron brought more scrutiny to corporate disclosures, Facebook is now feeling the effect of the need to prove its foundation is not only stable but extremely transparent. As a way to appease the recent breed of investors filled with pessimism and mistrust, the company has made some acknowledgements regarding its reported users.

In a recent SEC filing Facebook has admitted that as of June 30 approximately 8.7% of its 955 million accounts worldwide are, in fact, duplicates or have erroneously been created -- essentially 83 million of them. In its recent filing the company revealed the following:

We estimate that "duplicate" accounts (an account that a user maintains in addition to his or her principal account) may have represented approximately 4.8% of our worldwide MAUs as of June 30, 2012.

As of June 30, 2012, we estimate user-misclassified accounts may have represented approximately 2.4% of our worldwide MAUs (monthly active users) and undesirable accounts may have represented approximately 1.5% of our worldwide MAUs.

We believe the percentage of accounts that are duplicate or false is meaningfully lower in developed markets such as the United States or Australia and higher in developing markets such as Indonesia and Turkey.

However, these estimates are based on an internal review of a limited sample of accounts and we apply significant judgment in making this determination, such as identifying names that appear to be fake or other behavior that appears inauthentic to the reviewers.  As such, our estimation of duplicate or false accounts may not accurately represent the actual number of such accounts.

First, Facebook deserves a considerable amount of credit for its acknowledgement of its user base discrepancy. This suggests that it is nothing like Enron. What's more, the company has waged an unrelenting commitment to improving its ability to spot these false user accounts and put corrective actions in place.
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