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Clear Thoughts
Earning Season in a Sarbox World
| Do water down a law now that it is actually working. |
The Sarbanes Oxley Act of 2002 is often portrayed by public companies and the media as a burden. In practice, the Act has increased the quantity and quality of published fundamental data about public companies. This year, many firms are reporting more than one set of financial data, reflecting new rules requiring the inclusion of the impact of stock compensation in company results. This is part of the trend toward better disclosure requirements for companies. As financial controls get tighter and management teams are becoming more accountable, other items are being posted and explained in far clearer formats than ever before.
The number of companies filing restatements of earnings (according to San Francisco based Glass Lewis & Co.) and other material financial data in 2002 was 330 and increased in 2003 to 514, 2004 to 619 and 1,195 companies in 2005. Overseas companies that do business in the U.S. also experienced an increase in the number of restatements from 37 in 2004 to 100 in 2005. These companies trade on U.S. exchanges as ADRs and are evaluated for our new Clear International portfolio.
Of the reasons for financial restatements in 2005, expense-recognition mistakes ranked number one. Misclassifying accounting items was the second most frequent mistake, followed by equity-related errors, such as improper valuations for stock-based compensation.
The consulting firm is quoted as stating: Over time, as companies continue to improve their internal controls, we expect the number of restatements eventually will decline, perhaps this year.
The investment committee at Clear Asset Management agrees with this supposition.
This issue is very material to Clear Asset Management and our investors. As quantitative, investment managers, we rely on the quality of filed financials, earnings and stock prices. We crunch all the publicly available data about every public company, on every market day, to select the stocks we calculate to be the highest ranked for inclusion in our portfolios. In plain English: the more accurate the information, the better we believe that our algorithms (mathematical formulas) will work. We believe and hope that as more companies clean up their act and tighten their controls, their CEOs and CFOs will sign off on financials with confidence and pride, and that all investors will benefit.
During this earnings season, as usual, many companies are reporting their quarterly financial results in a short period of time. As we crunch all the new data, our algorithms are detecting new opportunities each day, and we are responding with our usual seasonal increase in trading. Each quarter that the Sarbanes Oxley rules and regulations are applied, we believe the company data that we evaluate becomes more scrutinized and therefore more precise. The ultimate proof will be in our performance.
PS A reminder for subscribers: subscription rates will double 5/8/06. Now is the time to lock-in the current rate and upgrade to an annual subscription.
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