Guide to Analysing Companies

ESSENTIAL FINANCE
01 Essential Finance 10/11/06 2:21 PM Page 12

---

perversely, the banks’ customers could also suffer because com-
panies and investment firms might find it more expensive to
hedge their risks and to react quickly enough to changes in the
markets.
Credit where it is due
If nothing else, the greater degree of transparency that has been
forced on companies, banks and the markets on which they
both rely will provide additional safeguards for investors.
Many were surprised by the failure of credit-rating agencies to
spot the problems at Enron, WorldCom and others before they
went bust. Such lapses raised questions about the agencies’
roles in the credit markets. Their main business is rating the
creditworthiness of bonds issued in the debt markets, but in the
1990s, like auditors before them, they started to stray into other,
more lucrative forms of consultancy. Where did the rating agen-
cies get their information from, how was it analysed, and are
their opinions worth the paper they were then written on, asked
Congress.
The loss of confidence resulting from the slew of corporate
failures not only contributed to the demise of Andersen, then
one of the world’s oldest accounting firms. It also led to the
passing of the Sarbanes-Oxley Act by Congress in 2002, an
attempt to bolster standards of corporate governance in the
United States and one of the toughest pieces of securities legis-
lation to be enacted since the Great Depression of the 1930s.
Wisely, Congress let the sec, the main US regulator of securities
markets, enforce the rules. Among other things, the act imposed
an independent regulator on the auditing profession, in the
form of the Public Company Accounting Oversight Board. It
also banned auditors from doing some non-audit work for audit
clients, thus preventing them from accepting certain types of
lucrative consultancy work that might conflict with their re-
sponsibilities as auditors.
Enron was brought down by the shifting of liabilities to off-
balance-sheet “special-purpose vehicles”, whose existence was
not disclosed to shareholders. To guard against similar abuses in
future, the act requires public companies to provide details of