After almost a year of ceaseless and stupefying scandal, investors know that if trust is to be restored in the financial system, radical change must come from executives, Wall Street and the accounting industry.
Too bad that those who need to do the reforming don't seem to agree. As the results of two new studies show, one about accounting firms and the other about securities analysts, the business-as-usual crowd still reigns.
It is widely acknowledged, for example, that conflicts of interest arise when accounting firms provide both auditing and consulting services to clients. The fees from consulting have vastly exceeded audit fees recently, making it harder for auditors to call out big clients over questionable accounting practices.
But while investors' concerns about auditors' independence are running high, companies seem unfazed. According to an analysis by the Investor Responsibility Research Center in Washington, consulting fees still dominate, and fewer companies have hired different firms for auditing and consulting services this year than did so last year. The center's comprehensive annual study of 1,240 American corporations shows that the proportion of fees paid by companies for nonauditing consulting services came in at exactly last year's level: 72 percent of the total paid. Average consulting fees were about US$3.2 million, compared with US$1.3 million for average auditing fees. And while nine companies used different firms to audit their results and provide consulting services last year, only six have chosen to do so this year.
Denial is a powerful thing. And entrenched business practices, especially those that are immensely profitable, will always be hard to change. But it is nonetheless remarkable how deep the resistance to change is in the upper echelons of business and on Wall Street, even after trillions of dollars have been lost by investors. Which brings us to the recent study of research analysts conducted by Weiss Ratings, an independent provider of ratings and analyses of financial services companies, mutual funds and stocks.
If any single group should be racing to change behavior, it is these folks. Analysts, under suspicion for some time, have been under investigation for more than a year. Thanks to these investigations, investors know with certainty that analysts routinely recommended shares to keep their firms' investment banking clients contented. But the cheesy cheerleading goes on. According to Weiss, three out of four brokerage firms covering companies that filed for bankruptcy from May 1 to Aug. 31 kept "buy" or "hold" recommendations on those companies' shares as they made their filings. Of the 62 brokerage firms studied, 34 failed to issue a single "sell" rating on any company that filed for bankruptcy in the period.
Firms issuing "buys" on bankruptcy filers include CIBC World Markets, JP Morgan, Thomas Weisel Partners, Bank of America and Raymond James.
"Given the highly misleading ratings still being disseminated by the brokerage community," said David Lackey, the president of Weiss Ratings, "it's no wonder investor confidence in the markets remains low."
If corporate executives and Wall Street sharpies want investors' respect, they must prove they are doing something to make dubious practices a thing of the past. They should stop denying the problem and quit trying to circumvent change by calling in chits from their friends in Washington.
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