The promise of corporate reform has met the unattractiveness of reality.
Despite corporate reforms, led by the Sarbanes-Oxley requirements, the number of companies with the riskiest accounting and governance practices has increased significantly, according to research by Audit Integrity LLC. The number of industries represented on the firm's watch list — which identifies companies with the highest risk for what it characterizes as poor accounting and governance practices, as well as low rankings in earnings quality or financial condition — rose to 85 from 75, according to the Los Angeles-based firm.
"(T)hree industries in particular remain the most visible when measuring poor accounting and governance practices," the report noted: biotechnology and drugs, medical equipment and supplies. Communications equipment, regional banks and electronic industries also occur frequently on the watch list.
There were 432 companies on the Audit Integrity's watch list as of March 31, up from 355 Jan. 4. The median market cap of those companies rose only slightly, to $267.44 million from $266.91 million, in the same period; but firms with market caps of more than $1 billion increased to 24% from 20%, showing that corporate governance problems are not just confined to smaller firms.
"While new regulation and harsher punishments appear to be in the news, accounting and governance practices, as measured by Audit Integrity, do not yet seem to be improving, and may in fact, be deteriorating," the report said.