Serious WorldCom Fallout: CIBC/Chamber Weekly CEO/Business Leader Poll by COMPAS in the Financial Post for Publication July 8, 2002

Transcription

1 Serious WorldCom Fallout: CIBC/Chamber Weekly CEO/Business Leader Poll by COMPAS in the Financial Post for Publication July 8, 2002 COMPAS Inc. Public Opinion and Consumer Research 1

2 Introduction In the week following the WorldCom scandal, the largest accounting scandal to date, Canadian business leaders have experienced a dramatic loss of confidence in the accounting firms servicing publicly traded companies, foresee an extended bear market, and believe that the future will lie with dividend-paying stocks. Business leaders blame most of all senior management and accounting firms. They assign some blame for the saga of scandal to investment dealers, securities regulators, and governments for privileging capital gains over dividends in tax policy, thereby providing an incentive for accounting irregularities. Few respondents assign much blame to the business press for poor reporting or mutual funds for poor assessment of accounting risk when making their investments. These are the key findings from the current web-survey of CEOs and other business leaders conducted by COMPAS on behalf of the National Post under sponsorship of the Canadian Chamber of Commerce and CIBC. Plummeting Confidence in Accountants for Publicly Traded Firms Canada s business leaders remain as confident as ever in the accountants who service their own firms but confidence in the accountants/auditors who serve publicly traded companies has fallen dramatically since January, at the time of the Enron scandal, as shown in table 1. In January, 54% expressed confidence in the ethics of the accounting firms serving publicly traded companies, scoring 5-7 on the 7-point ethics scale. Today, the corresponding proportion is 36%. In January, 20% perceived the ethics of these firms as poor, scoring 1-3 on the 7-point scale. This proportion has climbed to 37% today. One business leader had the following to add: The investing community has only seen the tip of the iceberg, and will continue to lose confidence in our capital market, accounting profession and corporate management. 2

3 Table 1: On a 7 point confidence scale where 7 means maximum confidence and 1, the opposite, how much confidence do you have in The ethics of the accounting or auditing firm employed by your own organization July 5, January 28, * 5 The ethics of accounting or auditing firms doing the books of publicly traded companies July 5, January 28, Who is to Blame and What is to be Done Management and Accountants Most of All to Blame, Business Press and Mutual Funds Least of All Among all the potential culprits for the saga of auditing scandals, business leaders blame senior management most of all, followed closely by accountants/auditors, as shown in Table 2. An extraordinary 97% assign blame to senior management compared to 81% to accounting firms, in the latter instance up from 56% in January. Many business leaders tend also to blame investment dealers and securities regulators (Table 2) as well as governments for a tax policy that privileges capital gains over dividend income (Table 3), thereby providing incentives for accounting chicanery. Comparatively few respondents blame the business press for poor reporting or mutual funds for poor assessment of accounting risk in their investments (Table 2). One business leader captured the outlook of respondents in the following words: In these particular cases and in many others through out the past years, the principal officers of the company, as well as the outside directors and the accountants are to blame. They know exactly what is going on and a few walk off very rich making many small investors take the loss. Table 2: Thinking of the high profile collapse of WorldCom following problems at Enron and Global Crossing as well as past meltdowns in 3

4 Canada (e.g. Confederation Life, Northland Bank), how much do you hold each of the following responsible? Please use a 7 point scale where 7 means very responsible and 1, the opposite. [ROTATE] The company management The accounting profession July 5, January 28, Investment dealers Government securities regulators The business and investment press Mutual funds Table 3: How much do you hold governments responsible for creating tax laws that encourage accounting chicanery by making capital gains so much more profitable for investors than dividend income? Please use a 7 point scale where 7 means very responsible and 1, the opposite. Governments for creating tax laws that encourage accounting chicanery by making capital gains so much more profitable for investors than dividend income Recommended Action Enhanced Auditing and Regulatory Powers and Especially Criminal Prosecution Canada s CEOs and business leaders are angry about the plethora of accounting scandals in recent months, and demand serious actions for improvement. When asked what actions should be taken to improve the quality and integrity of accounting, 83% of respondents agree that guilty players should be sentenced to prison to make a point, with 45% strongly agreeing, as shown in Table 4. Clear majorities agree with the suggestion that serious accounting errors be treated increasingly as criminal matters (74%), and that there should be enhanced legal powers and responsibilities for corporate audit committees (73%). More than half of the respondents favour enhanced legal powers and responsibilities for outside directors (57%) and 53% feel that securities regulators should be given enhanced powers and budgets. 4

5 Several respondents provided supplementary feedback on this issue: Auditors and audit committees need to address their responsibilities of proper corporate governance. Audit committees must be allowed to retain their own advisors, independent of the company's auditors. Individuals convicted of fraud and deceit should receive significant jail penalties in order to provide a compelling deterrent to such behaviour. It must not be forgotten that many people who purchased securities in these firms have been badly hurt and, in many cases, have had their lives irreparably worsened. It is akin to someone being permanently and severely disabled as a result of another s criminal negligence. It s easy to see these misdeeds as serious crimes warranting substantive prison sentences. The only way to bring this serious problem to a head is to punish, without delay, senior executives who have knowingly allowed this fiasco to occur. After the first senior executive is sentenced to a prolonged jail term the others will tow the line and revert to ethical business practices. I am bothered that my hard earned investments are going down the tube. Intent to mislead or perpetrate fraud clearly constitutes a criminal act that should be punished accordingly. A deliberate misrepresentation should be a criminal act. Table 4: As you may know, there s a lot of discussion in business circles about ways of improving the quality and integrity of accounting statements. Please score the degree to which you agree or disagree with the following proposals, using a 7-point scale, where 7 means strongly agree and 1, the opposite. [ROTATE] Guilty players in recent high

6 profile cases of accounting fraud should be sentenced to prison to make a point Serious accounting errors should be treated increasingly as criminal matters Corporate audit committees should have enhanced legal powers and responsibilities Outside directors should have enhanced legal powers and responsibilities Securities regulators should be given enhanced powers and budgets Impact Extended Bear Market and the Rise of Dividend-Paying Stock Canadian CEOs and business leaders believe that the saga of mega-scandals will have major impacts on the economy. A near two-thirds majority (66%) of respondents predict that the new corporate winners will be those firms that pay dividends because investors will want material proof that a company is really making money. Similarly, 65% feel that the scandals will have a serious longterm impact on willingness to invest in stocks, and extend the bear market, as shown in Table 5. While respondents are largely convinced that the scandal saga will extend the bear market, they are somewhat divided on two other potential fallouts whether there will be a longterm impact on the economy and whether fear of the market will lead to inflationary investment in real estate. Table 5: The following are some opinions about the potential impact of the high profile accounting scandals. Please score the degree to which you agree or disagree with the following proposals, using a 7 point scale, where 7 means strongly agree and 1, the opposite. [ROTATE] The new corporate winners will be those firms that pay dividends because investors will want proof that a company is truly making

7 money The scandals will have a serious longterm impact on willingness to invest in stocks, and extend the bear market The scandals will spur increasing real estate inflation as investors look for more trustworthy ways of investing their assets The scandals will have a serious longterm impact on the vitality of the North American economy Methodology The National Post/COMPAS web-survey of CEOs and leaders of small, medium, and large corporations and among executives of the local and national Chambers of Commerce was conducted July 2-4, Because medium and small companies are more numerous in the economy and hence among Chamber membership, actual respondents are drawn more from these strata than from the stratum of the largest companies. Because of the small population of CEOs and business leaders from which the sample was drawn, the study can be considered more accurate than comparably sized general public studies. In studies of the general public, surveys of n=172 are deemed accurate to within approximately 8 percentage points 19 times out of 20. The principal and co-investigators on this study are Conrad Winn Ph.D. and Jennifer McLeod. 7