WASHINGTON, Aug. 28 (UPI) -- The first accounting firm review by the U.S. Public Company Accounting Oversight Board, created as part of the stricter corporate governance rules under the 2002 Sarbanes-Oxley Act, has found "significant audit and accounting issues" at all of the Big Four accounting firms. But accounting firms aren't the only buffers protecting investors from other Enron and WorldCom-like corporate meltdowns; some investment analysis companies are offering nervous investors a broader look at companies to help them make good investment choices.
The SOX act, passed in July 2002, aims to protect investors by requiring companies to show that they have internal control over their financial reporting. It also requires independent review of auditing firms instead of peer review -- hence, the creation of the PCAOB.
Reports on each of the big audit firms -- Deloitte & Touche LLP, Ernst & Young LLP, KPMG LLP, and PricewaterhouseCoopers LLP -- were released by the PCAOB Friday. The public portions of the reports indicated audit and accounting fumbles, including one problem that eluded all four firms, resulting in several companies revising their balance sheets. That doesn't include whatever quality-control concerns could be in the private portions of the reports, available only to the audit firms.
But auxiliary troops are massing to protect the wary investor. Morningstar Funds is now giving fund companies a "fiduciary rating" based not only on their financial statements but also other elements of their fiduciary conduct, the investment research firm announced on Wednesday. The full ratings list will eventually include 2,000 fund companies.
"Our new Fiduciary Grades are designed to help investors like you find funds that put shareholders first. Specifically, the Fiduciary Grades can help identify which funds' managers, directors, and management companies have their interests aligned with those of fundholders," Morningstar said. "The Fiduciary Grade goes beyond the usual analysis of strategy, risk, and return ... (it) tries to capture some of the intangibles associated with making an investment decision."
New York-based RateFinancials Inc., is offering a report that shows how some companies are not doing a good enough job of creating understandable financial statements.
An estimated one-third of major publicly-traded companies file financial statements that don't accurately reflect the firms' true financial state, RateFinancials' research indicates. Thirty-eight of 120 companies studied received a score of "Below Average" or "Poor." The 120 companies represent 40 percent of the market capitalization of the S&P 500 index.
In evaluating the companies, RateFinancials looked at aspects of financial statements such as quality of earnings, overall accounting policies, corporate governance, and the clarity and completeness of statement footnotes and the management's discussion and analysis. It ranks companies on a numerical scale of one to 40 and also on a scale of one to five stars.
RateFinancials ranked 47 percent of the financial statements it analyzed as being, overall, average or "acceptable," 14 percent as "below average," and 1 percent as "poor." Thirty-five percent of the companies' filings received a "superior" rating, and 3 percent were ranked "outstanding."
The filings of Microsoft, BMC Software, and Family Dollar Stores were among those rated "outstanding." But no company surveyed achieved a perfect score of 40 points.
The report also indicated that 28 percent of companies examined used aggressive revenue recognition, where companies can often post revenue from transactions long before the goods and services or cash is received.
Another company, New York-based Criterion Research Group LLC, earlier this year came out with similar research that shows which companies are most likely to experience earnings restatements and SEC enforcement proceedings. The research showed nearly 60 percent of material earnings restatements announced this year involved companies with the highest accrual levels. Under accrual-based accounting, a company is allowed to book revenue as soon as goods or services reach a buyer, even if cash has not changed hands. Nearly 80 percent fall into the top model's top three deciles, or tenths, of accrual levels.
Some companies with low accrual levels include Pfizer, Gillette and BellSouth; some of the firms with the highest accrual levels include eBay, Boston Scientific and General Motors.
