Speaking of light getting shined in dark little corners - this appeared in NYT today:
Top Debt Rating Agencies Take a Look at Accounting
By JONATHAN D. GLATER
nytimes.com
The largest rating agencies, which received their share of criticism for failing to foresee the collapse of Enron more than a year ago or the accounting debacles last year, are planning to include evaluations of accounting policies in credit reports.
Depending on the form those evaluations take, they may do more to encourage greater disclosure by companies and their auditors than new regulations and legislation, some accountants said.
Standard & Poor's, Moody's and Fitch Ratings, which evaluate the creditworthiness of the vast majority of companies with publicly traded debt, say that in coming months they plan to give much more attention to analysis of accounting policies and practices in their reports on corporate borrowers. If a company has adopted particularly aggressive accounting techniques that are still acceptable under accounting rules, for example, analysts at the rating agencies would note that in their reports.
"The goal is to provide additional insight to Moody's analyst teams," said Greg Jonas, who started work on Monday as a managing director at Moody's and is heading the company's effort to build up accounting expertise. "If as a byproduct of being more insightful and outspoken as to companies' reporting, that encourages companies to improve the quality of their reporting and auditors to improve the quality of their auditing, that serves all" market participants, he said.
The initiatives by Moody's and S.& P., driven largely by last year's wave of accounting scandals, may encourage auditors to adopt a tougher stance with their clients, some accountants said.
"It provides leverage for the auditors," said Edward E. Nusbaum, chief executive of Grant Thornton, the country's fifth-largest accounting firm, according to Public Accounting Report, an industry newsletter. "You can go to a client and say, `It may be acceptable under generally accepted accounting principles, but you want the rating agencies to have a favorable view' " of the accounting, Mr. Nusbaum said. The auditor can then more forcefully suggest a more conservative approach, he said. "This might actually be more profound than some of the regulatory fixes."
Lynn Turner, former chief accountant of the Securities and Exchange Commission, agreed. "Now you have two competing forces in the marketplace," he said. "If I'm an auditor, I don't want to be sitting there and have Moody's come out and say my audit client is doing lousy accounting."
Of course, Mr. Turner noted, the rating agencies face the same fundamental conflict that auditors face: they are paid by the companies whose creditworthiness they are evaluating. How aggressive the rating agencies will be remains to be seen, he said.
The S.E.C. will release a report on the credit rating agencies by the end of the month, looking at barriers to entry in the business, the role of the agencies in evaluating issuers of securities, and potential conflicts of interest confronting them. Legislation passed last summer called for the report.
Moody's, which appears to be farthest along in its plans, is hiring 10 people whose job will be to assist the company's analysts in evaluating creditworthiness, starting with companies that carry large amounts of debt or that have potential accounting issues already identified by the agency, Mr. Jonas said. Mr. Jonas, who was responsible for developing audit methodology and technology at Arthur Andersen, said Moody's intends to add five more people over the next six months.
If Moody's analysts determine in the course of reviewing a company's financial disclosures that a company's accounting practices are more aggressive than those of its peers — perhaps the company recognized revenue more quickly — that information will be included in their report, Mr. Jonas said. The report would not be an audit and would not draw a formal conclusion about whether a company had complied with accounting rules, he emphasized.
Fitch, a unit of Fimalac, created a committee on accounting last summer, said Robert Grossman, chief credit officer at the company. Its focus, though, is on emerging accounting issues; analysis of the accounting practices at particular companies is incorporated into credit reports, he said.
S.& P., part of McGraw-Hill, assembled a task force on accounting issues last year. In October, it hired its first chief accountant, a partner from Ernst & Young, one of the largest accounting firms. The company is still determining what form its reporting on accounting policies will take.
"We will expand our commentary on issues of accounting quality," said Clifford Griep, executive managing director and chief credit officer at S.& P. "We're still researching what form that will take, whether it takes the form of an explicit section of our credit reports or, more likely, references to accounting issues that are material in the context" of a credit analysis, he said.
The rating agency's accounting experts will gather their information largely by talking to management about company financial filings. Ideally, they would also confer with auditors, but Mr. Griep said it was unlikely that auditors would want to provide information not included in their report.
"During Andersen's demise, there was an Andersen quote in the paper that Enron was one of their 50 most aggressive clients, so it begs the question of who the other 49 are," he said. "We asked Andersen who else was on that list. It was not information that they were in a position to provide." |
