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U.S. corporate reports yet to heed Enron's lessons
By Kevin Drawbaugh
WASHINGTON, May 31 (Reuters) - Annual report season is over for corporate America and it looks like business as usual, despite a chorus of demands for improved disclosure after the Enron (Other OTC:ENRNQ.PK - News) debacle and other recent corporate scandals.
This year's messages from management aren't much clearer or much fatter, said analysts and accountants, and fall far short of what is needed to reassure frightened investors.
"It's discouraging," said Chuck Hill, director of research at market research firm Thomson First Call.
"I would have thought we'd see more companies try to do the right thing, rather than just stick to the letter of the law and do the bare minimum ..., but it's not happening."
Every spring, U.S. companies distribute glossy reports ostensibly designed to update shareholders on the previous year's results, as well as give a glimpse of what's ahead.
But most corporate reports have become an exercise in spin, offering cheery photos of balding executives with big smiles and reams of only thinly interpreted, financial boilerplate.
Annual 10K and quarterly 10Q reports filed electronically by companies with the U.S. Securities and Exchange Commission leave out the pictures and emphasize hard financial data, but also offer little in the way of candid analysis.
"A lot of executives still approach these reports as doing only what is required to comply with the SEC rules, rather than trying to really inform investors," said Henry Hu, professor of banking and finance law at the University of Texas.
"Some of the reports I've seen do seem somewhat better than last year's ... but I think companies really need to do more."
The average size of 10K annual reports changed little from 2001 to 2002 for the 30 large companies of the Dow Jones Industrial Average, an informal Reuters analysis showed.
Moreover, the Dow 30's 10Ks have grown only slightly on average over the past 8 years, with periodic jumps in size likely reflecting spikes in merger-and-acquisition activity, rather than increased disclosure, accountants said.
BIGGER NOT NECESSARILY BETTER
Of course, bigger reports may not be better, they added.
"Just because something is longer doesn't mean it's better," said Bala Dharan, accounting professor at Rice University. "I think we need about the length we have, but with more clarity on what the company has to say."
Corporate reporting remains murky in spite of public outrage over the bankruptcies of energy trader Enron in December and fallen telecoms star Global Crossing (Other OTC:GBLXQ.PK - News) in January, as well as the troubles of companies like Xerox Corp. (NYSE:XRX - News), which paid $10 million in April to settle SEC charges it used "accounting tricks" to defraud investors.
Top managers at Enron allegedly used a complex web of off-the-books partnerships over several years to conceal losses and debt, while amassing vast personal fortunes.
The existence and risks of Enron's partnerships were disclosed in its annual and quarterly reports to shareholders, but only in dense legal language buried in obscure footnotes. Even professional investment fund managers have said they either overlooked or failed to understand the footnotes.
The Financial Accounting Standards Board, which writes the accounting rulebook, is trying to close the loopholes that Enron slipped through.
But the SEC, alarmed by the Enron case and other recent scandals, has been pushing hard for more up-front and timelier corporate reporting. An SEC official said it was hard to call whether the latest batch of reports marks a step forward.
"Right now we think it's too early to tell, but we've seen signs of good-faith attempts on the part of companies," said Jim Daly, associate director at the commission's division of corporation finance, in an interview.
"As this process evolves, we expect that there will probably be more disclosure consistent with what the commission's guidelines call for," Daly said.
Arthur Levitt, chairman of the SEC from 1993 to 2000, said the commission's push for better disclosure is succeeding.
"Some companies will respond by throwing the most information they can at you. Other companies, I suspect, will be more efficient in terms of how they disclose," he said.
Some improvement was noted by analysts in the latest report from General Electric Co. (NYSE:GE - News), the world's biggest corporation. And, as always, the plain-talking report of multibillionaire Warren Buffett's company, Berkshire Hathaway (NYSE:BRKa - News), was held up by activists as a model for all.
NEW SEC RULES ON THE WAY
Better reports may come next year. The SEC is expected to adopt new rules soon requiring more and timelier reporting on accounting policies and a variety of other subjects.
Efforts earlier this year by the SEC to cajole this sort of information out of companies failed, with most barely flinching at a January SEC "cautionary advice" memo on accounting policies, accountants and lawyers said.
Changes to the crucial "Management Discussion and Analysis" sections of most 10Ks were "certainly not robust" after the SEC's memo, said Jay Hartig, partner and SEC services leader at accounting giant PricewaterhouseCoopers' national office.
Both companies and their lawyers viewed the SEC memo "as advisory in nature ... more of a suggestion than an out-and-out requirement," Hartig said.
Advised by lawyers with an eye toward liability risks, most U.S. companies are unlikely to respond to any call for greater disclosure that isn't legally mandated, said shareholder activist Nell Minow, editor of The Corporate Library.
"Companies will wait for more guidance from the SEC and the exchanges before they do anything more than they absolutely, positively have to," Minow said.
"They're afraid of doing something that isn't required .... They still just haven't learned that the one who provides the best, clearest, most accessible information wins."
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