Agency Assurance - Universität St.Gallen

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Audit committees must not only address communications made by their own officers
and shareholder relations staff, they need to consider also reviewing the transparency
of statements and reports of external agents with influence in the financial markets.
The cases of Henry Blodget at Merrill Lynch, Jack Grubman at Salomon Smith Barney
(subsidiary of Citicorp), and Frank Quattrone at Credit Suisse First Boston represent
the widespread criticism of the investment banking industry. These and other high
profile investment advisory analysts were making buy recommendations to the public
of their client companies’ shares throughout the 1990’s, while their own internal
analyses and actions over the same period were to sell.
In response to these hype-related actions being exposed, it seems another form of
intransparency has surfaced, that is to downplay positive results. There were
indications in 2003 that financial analysts at investment banks may have made overly
conservative earnings estimates as a form of “conditioning” of investors to help keep
stock prices rising as companies’ actual announced earnings “beat” the estimates. 17
The accounting profession’s own criticism of the usefulness of standard financial
reports while promoting value based reporting, as well as the government’s
requirements of standard risk language in every prospectus (regardless of the actual
risk content of the proposed transaction), provide further examples of intransparency,
even though these external agents’ intentions were to improve information asymmetry.
An organization needs more transparent financial statements and announcements and a
rigorous MSI disclosure regime for its shareholders and stakeholders, which takes
responsibility for the information distribution channel and serves analysts and other
financial information intermediaries. Microeconomic supply and demand logic calls
for building trust in the shareholder base. Existing equity holders’ confidence in the
corporation will lead to a scarcity of shares willing to be sold, while good
communications practices also create demand from outside investors, helping to
support or drive up the price of the shares, i.e. the company value.
Confidence in the stock markets overall will provide the vehicle for liquidity for
shareholders when they need it in the future, and for management to acquire large
blocks of investment funds. The result should be a higher loyalty from shareholders,
poking holes in the short-term investment logic so often criticized by CEO’s and
17 Schwartz (2003).