Post-Enron survey reveals split on off-balance-sheet items

NEW YORK, NY, March 12, 2002 — A post-Enron survey of 50 U.S. asset managers and analysts conducted by Citigate Dewe Rogerson, a global investor relations firm, revealed significant divisions in their perceptions of the scope of accounting problems now facing the investment community, and the necessity of new regulations to address them.

During February, Citigate Dewe Rogerson anonymously surveyed 50 buy-side analysts and portfolio managers, and sell-side analysts who cover companies in sectors affected by accounting issues. In total, the respondents’ firms had over $2.6 trillion in total equity assets under management.

Specifically, 41% of the asset managers and analysts surveyed see widespread inconsistencies in the presentation of off-balance-sheet items, while the other 59% believe these problems are confined to only a few companies. Nearly one-third (31%) of the respondents who believe these problems are company-specific believe that accounting issues exist both in industries that typically use off-balance-sheet items or special purpose vehicles (SPVs) and those that do not. However, 40% of the total respondents told Citigate Dewe Rogerson that they or their firms are focusing on accounting issues within these sectors: energy, banking and financial services, telecommunications and biotechnology.

Asked if they expect company or regulatory action are necessary to solve the current accounting issues, 54% believe new regulations are needed, and another 20% foresee a combination of new regulations and new actions by companies to present financial information more clearly. The remaining 26% of the respondents believe that companies will respond to market demands and can solve these issues on their own.

Of the respondents who believe that problematic accounting practices are widespread, 75% called for further regulation. However, one-quarter of those who believe the problems are widespread believe that new government regulations would not be helpful.

“Wall Street craves consistency. This lack of consensus about how to present basic financial performance reflects a deep uncertainty that can undermine the credibility of even the best companies,” said John McInerney, senior director at Citigate Dewe Rogerson. “Wall Street doesn’t usually think government has the answer. Yet nearly 75% of the people we spoke to think new regulations are needed to sort out uncertainties surrounding off-balance-sheet items and SPVs. We find it especially compelling that a majority of the respondents who characterized the accounting problem as ‘limited in scope’ either call for additional regulation or think that companies should present this information more transparently.”

The survey also showed disparities in the information investors seek from companies when they have questions about off-balance-sheet items. If a company’s financial statements raised questions, the respondents were either generic in describing what they wanted, or showed a disparate approach to the information they most often requested to address their needs. Some 36% simply said they wanted “more disclosure.” Another 60% offered up between one and four general areas in which they often seek more information. Several points were mentioned by more than one respondent, yet there was no consistency in the pattern of response. In an ideal world, the respondents said they wanted the following information about SPVs:

– Separate financial statements for off-balance sheet entities or total liability disclosure
– Actuarial assumptions underlying the valuation of securities that are marked to market
– A limit to the number of SPVs that can be used
– A discussion of the triggers for contingent liabilities
– Clearer disclosure of non-operational income and liabilities
– Breakdown of line items that comprise several businesses
– Clearer discussion of liabilities relating to stock options
– Greater clarity of revenue recognition (for SPVs)
– A discussion of counterparts or partners

Naturally, some of these items would require significant changes in practice or regulation. Some-what surprisingly, 4% of respondents said that all of the necessary information was already available in Federal filings and that analysts simply needed to “produce more thorough research.”

To eliminate real or perceived conflicts of interest, several companies have recently announced that they would assign auditing and consulting to different firms. When asked if a failure to split the two assignments would ultimately result in a trading discount, 48% predicted that there would be no penalty discount if companies failed to do so. These respondents either feel the issue is too short-term to matter, or that the nature of the consulting assignments are too difficult to track meaningfully.

Of the remaining 52% of the respondents, 36% of the total believe that discounts would eventually apply to stocks of companies that didn’t separate auditing and consulting assignments. Many in this group believe that some kind of regulation will eventually separate the two functions and that even a perception of a conflict could create a discount. Participants were cautious to speculate on the degree of potential discount in this uncharted area, but said it would likely be small. Another 16% of the total were undecided about the likelihood of a discount.

Finally, 30% of the respondents mentioned that they or their firm had located companies with accounting problems in their portfolios. The other 70% told us that they had either avoided these companies or no longer held them.

Citigate Dewe Rogerson is a public relations and financial communications firm with offices in New York, London, Hong Kong, Chicago, San Francisco, and major European financial centers. The firm has more than 500 clients worldwide.

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