AuthorTopic: Advocates ask companies for full financial disclosure
jooey
@2002-11-09 22:25:24
By DEBORAH CROWE
Scripps Howard News Service
October 31, 2002

BOSTON - Advocates for full disclosure of public company finances pressed their case this week during a national conference aimed at investment professionals and the media.

"Sunshine is the best disinfectant," said Rebecca McEnally, vice president for advocacy for the Association for Investment Management and Research, whose members include portfolio managers, brokerage-house analysts and investment counselors.

The association long has called for more independent and aggressive reporting by analysts and less tolerance for accounting practices that hide a company's bottom-line weaknesses. But in the wake of accounting scandals at companies like Enron, Arthur Andersen and Adelphia, more people are paying attention.

AIMR co-sponsored the two-day conference, "Financial Reporting and Reality," with the Society of American Business Editors and Writers.

Jay Tararia, managing director of Chicago-based Sanskar Investments Inc., noted Monday that during the market bull run of the 1990s far too many analysts and investors became complacent and failed to detect early weaknesses in the financials of some public companies.

"We got caught up in the 'What did you do for me lately?' mode," said Tararia, who also is education director for the Investment Analyst Society of Chicago. "If we didn't get a 20 to 25 percent return on investment, we'd get fired."

When earnings growth rates began to falter, high-profile investment analysts - whose recommendations can cause share prices to soar or plummet - felt the pressure to beat the drum for companies they covered. Many analysts were compensated based on the success their company's investment bankers had in making deals with the same companies.

And some company executives couldn't resist manipulating earnings by exploiting the generally accepted accounting practices at that time, conference speakers said.

They added that accounting techniques used weren't new, such as counting anticipated revenue as actual revenue and moving debt and other liabilities to obscure special purpose entities that wouldn't show up on the usual financial reports.

"The abuses just were more egregious because the bubble leading up to them was bigger and longer," said Chuck Hill, director of research for Thomson/First Call, best known for polling Wall Street analysts on companies' earnings expectations.

There were several workshops during the conference that ended Tuesday. While analysts learned new ways to better value a company's stock from clues hidden in the footnotes of quarterly reports, journalists were schooled on accounting loopholes that can double a company's apparent net income for a quarter.

"No shareholder ever reads the 10K properly, they just don't have the time," said workshop speaker Tararia, referring to a company's detailed annual report filed with the Securities and Exchange Commission. "Yet it can comprise 90 percent of your knowledge base about a company when you're analyzing the (quarterly report)."

In addition to educating analysts and journalists, AIMR promoted its standards.

The association has more than 60,000 members worldwide who are required to sign an annual statement declaring their adherence to the group's ethics code and to disclose complaints made against them.

AIMR now is touting its chartered financial analyst program, which includes a rigorous series of three six-hour exams on a range of investment topics.

Just 17 of every 100 CFA candidates complete the requirements in five years, according to Richard Wyler, AIMR vice president for public communications.

The association this week launched its first TV and radio campaign to raise public awareness about the value of the CFA certification. Most CFAs work for so-called buy-side firms - mutual funds, insurance companies and other institutional investors.

The association wants more CFAs and general members who are sell-side analysts, such as those who work for brokerage houses and investment banks, and personal investment advisers, Wyler said.

AIMR officials have lobbied lawmakers and regulators for reforms that would make it easier for investors to detect conflicts of interest by analysts, and restrict the ability of companies to hide assets and liabilities, particularly those relating to employee stock options and pensions.

"We want to get better information into the hands of investment professionals that will enable them to make better decisions for their employers or clients," Wyler said.




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(Contact Deborah Crowe of the Ventura County Star in California at www.insidevc.com.)

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Edward Liu

Edward Liu