Stock market demands have always affected corporate decision making. But the chief financial officers who responded to this month’s CFO Forum say that over the past decade, the relationship between publicly traded companies and Wall Street has grown closer and ever more significant.
Ninety percent of the respondents rate the pressure to meet Wall Street’s earnings estimates as high or extremely high. Only 18 percent think the pressure is worse these days than it was a year ago, but 70 percent believe it has increased from five years ago, and 86 percent feel that there is more pressure than there was at the end of the 1992 recession.
More than three out of four CFOs say that accounting fraud is more prevalent today than it was ten years ago. But only 42 percent believe that limiting the consulting services auditors can give their clients will reduce instances of fraud.
With all of the Big Five accounting firms currently under scrutiny for questionable audit decisions, CFOs are feeling the backlash as well. Slightly more than half say their credibility has been damaged to some extent. More than 8 percent believe the credibility of all financial reports -- including their own -- is now suspect.
Fully 92 percent of the CFOs we asked say that the need to meet earnings expectations contributes to accounting fraud and related improprieties. A staggering 98 percent believe the pressure to meet earnings goals motivates aggressive interpretation of accounting rules.
Eighty percent of respondents say companies need to clearly disclose accounting practices. Two out of three believe Wall Street will reward companies whose accounting policies they understand, while 83.3 percent say the Street will penalize those companies whose accounting policies are too convoluted.
Please rate, on a scale of 1 to 5 (with 5 being the highest), how prevalent you believe accounting fraud and mistakes to be in corporate America today.
1 44.0%
2 36.0
3 14.0
4 6.0
5 0.0
How does this compare with the level one year ago?
Much higher 2.0%
Higher 22.0
Lower 4.0
Much lower 0.0
No change 72.0
How does this compare with the level five years ago?
Much higher 6.0%
Higher 62.0
Lower 2.0
Much lower 0.0
No change 30.0
How does it compare with ten years ago?
Higher 76.0%
Lower 0.0
No change 24.0
Do you think that limiting the consulting services that professional services firms perform for their audit clients would help reduce the prevalence of accounting fraud and mistakes?
Yes 42.0%
No 58.0
Please rate the degree of pressure on public companies today to meet the financial community’s quarterly earnings expectations.
Extremely high 52.0%
High 38.0
Moderate 10.0
Low 0.0
Extremely low 0.0
How does this compare with what it was one year ago?
Higher 18.0%
Lower 4.0
No change 78.0
How does this compare with what it was five years ago?
Higher 70.0%
Lower 4.0
No change 26.0
How does it compare with what it was ten years ago?
Higher 86.0%
Lower 4.0
No change 10.0
Do you think this pressure to meet expectations contributes to instances of accounting fraud or related improprieties?
Yes 92.0%
No 8.0
Do you think this pressure contributes to aggressive interpretation of accounting rules?
Yes 98.0%
No 2.0
Do you think that there needs to be clearer disclosure of accounting practices used by a company?
Yes 80.0%
No 20.0
Do you think Wall Street will reward companies whose accounting policies they understand?
Yes 66.7%
No 33.3
Do you think Wall Street will punish companies whose accounting policies they do not understand?
Yes 83.3%
No 16.7
With all of the Big Five accounting firms now under scrutiny for questionable accounting decisions, to what extent do you feel the credibility of your financial reports is affected?
A great deal; all reports are now suspect 8.2%
To some extent 51.0
No effect 40.8
The results of CFO Forum are based on quarterly surveys of a universe of 1,600 chief financial officers. Because of rounding, responses may not total 100 percent.
