Broadcast October 23, 2002
There are only two kinds of forecasters when it comes to the stock market -- those who don't know where the market's going, and those who don't know they don't know. I'm in the former category.
But I can tell you this. Investors are scared stiff. And it's not just the pending war with Iraq that's spooking them. Another big reason they're scared is they don't know whether they can trust corporate earnings reports. Share prices are related to earnings, of course, and third-quarter reports are now hitting the Street. Yet investors don't have much confidence the numbers they're getting are real.
Even if the era of "earnings management" by "aggressive accounting" is over, the legacy of Enron, Global Crossing, Worldcom, and the rest of Corporate America's Hall of Shame remains. It's a huge shadow of doubt over the balance sheets and quarterly statements of every American corporation -- including those companies that never played fast and loose with their books.
In fact, there are good companies out there whose stock price is undervalued right now. The problem for these companies is they can't get the good news out to a public that's discounting all stock prices because investors are so skeptical about what companies say about themselves these days -- and about what Wall-Street analysists say about any company.
Now, you'd think good companies -- and Wall Street in general -- would have a huge financial stake in restoring public trust in corporate America, right? I mean, the good apples should want investors to be able to distinguish between them and the bad. They should want investors to have information they can believe in.
So logically you'd expect these good companies would be lobbying like mad for the toughest possible laws and rules on corporate disclosure -- implemented with real teeth. But instead, as momentum for accounting reform fades, laws passed in response to the worst scandals in living memory are getting watered down. And Wall Street is looking the other way.
Congress has adjourned, Iraq is in the headlines, and nobody's talking anymore about making investment bankers, lawyers, and accountants liable for fraud. Or reducing conflicts of interest between stock analysts and investment bankers at the same companies. Or preventing auditors from doing consulting, requiring companies to rotate their accountants, or counting stock options as expenses on the balance sheets.
It's over, folks. The Securities and Exchange Commission was supposed to create a new five-member board to regulate the accounting industry. But it looks as if the board is going to be a paper tiger. Every time the SEC considers an appointee who might be a tough regulator, the accounting lobby says no, and that's the end of it.
Well, Wall Street can't have it both ways -- toothless laws about corporate disclosure and also a robust stock market. Companies with good news to tell can't get their news out because investors remain skeptical about all the news they hear from Wall Street.
