April 15, 2013

Financial Analyst Survey: “Chinese Wall? Reg FD? Never Heard of Them…”

This new study about sell-side equity research analysts entitled “Inside the ‘Black Box’ of Sell-Side Financial Analysts” by Profs. Brown, Call, Clement & Sharp may surprise you – or it may not given all that is wrong with this world. The findings are disturbing, including:

Analyst compensation – 44% of the analysts surveyed indicate that their success at generating underwriting business or trading commissions is very important to their compensation (see page 43).

Private communication with management – Analysts rated private phone calls with management as the most useful form of direct contact with management of the companies they follow. Further, the analysts specifically responded that private communication with management is very useful for determining their earnings forecasts and stock recommendations. In interviews, analysts said their private phone calls with management provide color and granularity and that management is more candid on private calls than public calls. Analysts said they get to check their model assumptions on private calls, and that management goes into details on private calls that they aren’t willing to discuss on public calls (see discussion from pages 23-25). Thus, the analysts appear to be receiving private information (from these calls) that benefits them directly in terms of their performance.

Meanwhile, in this survey of hedge fund professionals – commissioned by Labaton Sucharow, HedgeWorld and the Hedge Fund Association – 46% said they believe that their competitors engage in illegal activity, 35% have personally felt pressure to break the rules, and 30% have witnessed misconduct in the workplace. When asked if they would blow the whistle or report the misconduct, 87% of respondents said they would report wrongdoing given the protections and incentives such as those offered by the SEC Whistleblower Program.

The Debate Over Audits Signed by Audit Partners

Last week, the SEC brought an enforcement action against a former KPMG partner for insider trading seems to have renewed calls to have individual audit partners identified as part of audit reports. This garden variety case has brought a flurry of interest by the media into a 2011 PCAOB proposal that would require to disclose the names of audit partners on financials, rather than just the firm name. The idea is that this requirement would allow investors and companies to know who is responsible for audit work – particularly useful if a specific individual gets into trouble like this. As noted in this WSJ blog, the PCAOB is expected to act on this proposal in the next few months – but is facing opposition from auditors who are concerned about increased liability for audit partners.

Meanwhile, this WSJ blog notes that Hallador Energy already publishes the names and ages of its lead and concurring audit partners for its financials. And this article discusses a new Cornerstone study showing that accounting class-action lawsuit filings declined sharply last year after a spike in 2011 – but settlement amounts in such cases have grown since 2011.

SEC Announces EDGAR Update for XBRL 2013 US GAAP Taxonomy

As noted in this memo, the SEC recently announced that, if approved by the Commission, the EDGAR system would begin accepting submissions with XBRL exhibits based on the 2013 US GAAP taxonomy on April 29th (and no longer accept submissions with XBRL exhibits based on the 2011 GAAP taxonomy).

– Broc Romanek