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Thursday, December 23, 2004

Sarbanes-Oxley Confessionals

NEW YORK - Dedicated readers of The Wall Street Journal are used to the full-page notices addressed to shareholders that either polish someone's image or solicit their support in a battle for corporate control.

This Tuesday, however, a whole new type of notice appeared--this time with the unlikely sponsorship of PricewaterhouseCoopers. The notice bears the eye-catching caption, "Public Trust Is About To Be Tested Again." Now, anyone with more than ten cents in the market knows these are words that will get more than one investor's pulse rate rising (just think Enron and Worldcom). Add to this that the words are coming from the public's mainstay for trust--namely the company auditors--and you really wonder what's afoot.

The purpose of the notice is to warn investors that the Sarbanes-Oxley Act is about to drop the other shoe. Specifically, under Section 404 of the Act, independent accountants are required to give their opinion on whether the company has material control weaknesses, which "could" cause a misstatement of results in the annual, or interim, financial statements. This is required even if there is no evidence that such a misstatement has happened or will happen.

What is clearly on the minds of these guardians of the public trust is that all such disclosures will become daily fodder for the media, which in turn may cause a reaction in the stock market. This, in turn, will cause a flurry of class action lawsuits. The notice tries to downplay the seriousness of the problem by pointing out that companies who operate globally are forced to deal with a mix of cultures and regulatory systems that don't conform closely to the way business is done in the U.S. Recent scandals involving overseas managers making their own rules, or pillaging their local company, are not uncommon, but are usually swept under the rug. Not any more. Now the mere possibility of this happening must be disclosed.

No doubt, some ugly stuff is going to come out, because these are things that can't be fixed over night. No doubt, short sellers and their friends in the media will be primed for action. The notice does conclude with the statement, "the first 404 reports should be viewed as the beginning of a process, not an end." I don't think they meant "process" as in a legal process server, although that misreading may be apropos.

You might call this notice the accountant's equivalent of an earnings alert. It is an effort to inoculate the market against the arrival of bad news. Wall Street's reaction? The Dow closed up 95 points on Dec. 22. Go figure.

posted by Brian Moran @ 8:43 AM   0 comments

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