Accounting Deadline Passes with No Surprises

(August 16, 2002)Several weeks ago we wrote that August 14th could have been a significant day for the financial markets. On that date the chief executives of America’s largest companies were required to swear by the accuracy of their financial statements to the Securities and Exchange Commission (SEC). The requirement was part of a larger piece of legislation called the Sarbanes-Oxley Act, passed in July, which includes many new laws to punish and deter corporate misdeeds.

As we suggested, most companies are well run by ethical people and those companies met the deadline with no problems. Some companies that already have more problems then they can handle (WorldCom, Adelphia, Enron, etc.) did not meet the deadline and no one expected them too. Their executives and stock have been punished by the markets and the courts are already pursuing the companies. Several corporations made modest adjustments to their financial statements. Those adjustments would have been made in the normal course of the calendar year anyway, but were announced early to coincide with the new deadline.

As a result of most corporations complying with the regulation, on time and with few adjustments, the stock markets have been able to hold on to most of their recent gains and extend their short-term rally through August 16, 2002 as of this writing. Investments, from our perspective, trade on equal amounts of facts and faith. The facts are always a matter for debate, but are usually quantitative (numbers based) and less subjective. Faith however, is a tricky and emotional part of the investor’s psychology. Without the investor’s faith in the markets, the numbers don’t even matter. Let’s hope the days that pass from August 14th forward make chief executives and business people cognizant of the fact that their actions are just as important as their profits.