Greenspan Predicts Companies Will Restate Earnings Downward
Wed Jul 17, 9:59 PM ET
>>"The trouble, unfortunately, is that the shock of what has happened will keep malfeasance down for a while," he said. "But human nature being what it is -- and memories fade -- it will be back."<<
By: Michael M. Phillips, Staff Reporter of The Wall Street Journal
WASHINGTON -- Federal Reserve ( news - web sites) Chairman Alan Greenspan ( news - web sites) predicted Wednesday that a large number of U.S. corporations would restate earnings downward in coming months, but that such a development wouldn't hurt the American economy.
In a second day of testimony on Capitol Hill, Mr. Greenspan sought to accentuate the resilience of the U.S. economy amid a landscape of company- accounting scandals, dubious corporate ethics, highly volatile financial markets and legislative fervor to punish white-collar criminals.
"I do believe there are going to be significant restatements," the Fed chairman told the House Financial Services Committee. But, he added, "I am not terribly concerned about any impact" on the economy.
Mr. Greenspan said that the restatements, by companies that thrived during the great market run-up of the 1990s, will signal executives' understanding that they can no longer fiddle with their books to smooth or boost profit reports. Mr. Greenspan didn't pick out individual companies for criticism, but WorldCom Inc., which has admitted to misclassifying $3.8 billion in operating expenses, inflating its reported profits, is among several mired in scandal over their accounting practices.
In the first half of this year, 112 companies restated their earnings, according to research by Min Wu, a Ph.D. candidate in accounting at New York University's business school.
More restatements are generally expected as a result of a Securities and Exchange Commission ( news - web sites) decision on June 28 ordering chief executives and chief financial officers of more than 900 publicly traded companies to swear to the accuracy and completeness of their corporate financial statements. Many face an Aug. 14 deadline, and are also facing the possibility that Congress will impose stiff criminal sanctions on those whose statements are fraudulent. The result is that many companies are likely to restate their earnings in the weeks ahead.
Before the House, Mr. Greenspan repeated his optimistic outlook for the U.S. economy, saying that business investment in the 1990s is continuing to generate productivity improvements that ensure strong growth. Labor-productivity growth averaged 1.35% a year from 1974 through 1990, jumping to 1.54% during 1991-1995 and 2.43% from 1996 through 2001, according to government data. In the first three months of this year, productivity surged an annualized 8.4%.
Mr. Greenspan also said he didn't believe that housing suffered from a " bubble" and discouraged assumptions that the dollar, which recently has been sliding against other currencies, will continue its decline.
The Fed estimates the U.S. economy will grow 3.5% to 3.75% this year with little inflation.
"The reason I'm reasonably sure about the fact that the malfeasance that we've observed and documented in very great detail has not cut to the core of the system, is the fact that we have got a remarkably efficient and productive economy," Mr. Greenspan said.
Mr. Greenspan's comments brought no joy to the stock market, however. The Dow Jones Industrial Average fell to 8462, from 8654, during his three-hour appearance. The blue-chip index bounced back to close at 8542.48, up 69.37.
With lawmakers eager to demonstrate their anger about corporate misbehavior, Mr. Greenspan suggested that most business executives will be more scrupulous in their accounting, at least for the moment. "The trouble, unfortunately, is that the shock of what has happened will keep malfeasance down for a while," he said. "But human nature being what it is -- and memories fade -- it will be back."
Nonetheless, the chairman urged Congress not to force companies to straighten up by reporting stock options as expenses, saying that the private Financial Accounting Standards Board will probably do that itself. "My impression ... is that if you leave it to FASB, they'll get it right," he said.
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