Tracy Herrick, an economist and chief investment strategist, has two suggestions that might improve financial statement credibility for investors concerned about accounting reliability in the wake of the scandal involving Enron Corp. and its auditor, Arthur Andersen LLP.
First, he suggests investors place a higher value on audits by accounting firms with no conflicts of interests than on those performed by firms that provide both auditing and consulting services. "These single-purpose firms would be able to charge more for their services," said Mr. Herrick in an interview.
"Their higher fees would be worth the price," he noted in a recent report to clients. "The assurance of authenticity would represent a premium to investors."
Second, he thinks investors could find credible financial information in the corporate loan reviews of banks, which examine finances for most companies. He suggested in the interview that banks should make that credit information available to investors for a fee. Using bank credit reports "was the way major investors checked the books of their investments before accountants began auditing businesses in 1903," he noted in his report.
Alison Estrada, spokeswoman for the Bank Administration Institute, Chicago, didn't comment on the idea, suggesting investors use credit-rating services.
Mr. Herrick said in the interview there's also a problem with credit-rating services: the company whose credit is being rated is the customer who pays the firm for the evaluation. "Credit-rating agencies don't want to lose customers," he said. Investors, who should prize the information for helping in their decisions to buy and sell securities, should be the ones paying for the reviews, he said.
Frances Laserson, vice president at Moody's Corp., dismissed the assertion about conflicts of interests at ratings agencies. "We have relationships with 5,000 companies No one company accounts for a material percentage of our revenue."
"If we were susceptible to customer pressure, you'd see higher rated companies default."
