TheCorporateCounsel.net

In the the latest issue of his “Audit Committee & Audit Oversight Update”, Dan Goelzer notes a new study that concludes that the SEC & investors don’t put a lot of trust into companies that use “trust words”.  Here’s how Dan summarizes the study’s findings:

The authors counted the number of times 21 trust words appeared in the MD&A section of 3,595 reporting company Form 10-Ks from 1995 to 2018. The 21 words were: accountability, character, ethics, ethical, ethically, fairness, honest, honesty, integrity, respect, respected, respectful, responsible, responsibility, responsibilities, transparency, trust, trusted, truth, virtue, and virtues. About half of the sample used the trust words and the mean value of the number of trust words used was 1.8.

Study findings include:

– Market reaction to earnings announcements is lower for companies using trust words than for those that do not. This suggests “that the use of trust words is negatively associated with the information content of earnings.”

– “Lower ability managers” are more likely to use trust words.

– Companies that use trust words are more likely to receive comment letters from the SEC, and these comment letters are likely to raise accounting issues.

– Companies using trust words tend to pay higher audit fees. “Our result suggests that auditors assess higher audit risk or/and exert greater audit effort for firms using trust words in 10-Ks., suggesting higher audit risk for these firms.”

– There is a negative relation between the use of trust words and corporate social responsibility scores.

I don’t think any of these findings comes as a surprise – although I bet the one about “lower ability managers” is gonna leave a mark on a few management teams! I’ve always thought that the more cringeworthy a company’s investor communications are, the more reason people have to be skeptical about it. Anyway, Dan says that the study’s bottom line is that “firms using trust words tend to invite more scrutiny from investors, the SEC, auditors, and others. Thus, the use of trust words seems to reflect the opposite of a firm’s culture of trust.”

– John Jenkins