Academic journal article Journal of Accountancy

Corporate Governance and Client Investing: Selecting Top-Notch Money Managers Is Key in a Post-Sarbanes-Oxley World

Academic journal article Journal of Accountancy

Corporate Governance and Client Investing: Selecting Top-Notch Money Managers Is Key in a Post-Sarbanes-Oxley World

Article excerpt

EXECUTIVE SUMMARY

* AS CORPORATE GOVERNANCE ISSUES TAKE ON INCREASED importance in the value of a stock, CPAs should take the opportunity to get ahead of the curve and help clients monitor such issues. There is general agreement that the quality of corporate governance and the effectiveness of a board of directors are critical to a company's success.

* CPAs SEARCHING FOR STOCKS OF COMPANIES WITH GOOD governance practices to recommend to clients can focus on factors such as an absence of accounting problems, employee stock option and executive compensation plans that are in the best interests of shareholders, a board of directors that isn't dominated by shareholders with large blocks of stock and ensuring that management is pursuing a sound business strategy.

* UNTIL INFORMATION ON CORPORATE GOVERNANCE practices of companies becomes more easily available, CPAs will rely on individual and mutual fund managers to monitor these issues only after carefully screening the managers themselves. To help do this CPAs should select only managers who have established reputations for integrity and ethical practices.

* SOME CPAs ARE SKEPTICAL ABOUT THE INFORMATION provided by corporate governance rating services such as Moody's or Governance Metrics International. To be effective, rating systems have to know what investors absolutely can't live without--full disclosure, director independence and a sound business strategy.

With the debris of bad corporate governance still falling from the sky--more than a year after the first major blasts erupted--it would be reasonable to expect questions about related guidelines and policies to be forming on every investor's lips. But that's not what CPA investment advisers are finding in the field. Most clients haven't started to ask yet. In the meantime reactionary trends are taking hold that practitioners need to consider and apply in their work.

This article explains how some advisers have begun to work corporate governance issues into investment decisions. And with others expected to follow the trend as clients begin to understand these complicated issues better, company ethics will become a more important criterion in choosing investments than ever before. Here's how CPAs can be ahead of the curve on a developing trend and keep themselves and their clients well informed.

DOES GOOD GOVERNANCE MATTER?

If investors and the CPAs who advise them learned anything from Enron, WorldCom and other companies whose problems came to light during the past few years, it's that the quality of corporate governance and the effectiveness of the board of directors are critical to an organization's success. Yet most of those who agree good corporate governance is important to a company's success probably are not yet using it as an investment-screening tool. With the ink on the Sarbanes-Oxley Act of 2002, and related SEC rules to implement it, just beginning to dry, most investment advisers are beginning to give substantive thought to the consequences of good or bad corporate governance on a stock's investment prospects.

Sheryl Rowling, CPA/PFS, of Rowling Dold & Associates in San Diego and a member of the AICPA PFP executive committee, says right now her clients are "more concerned about the overall integrity of the market than they are with an individual company's financial statements. The interest in corporate governance behavior hasn't yet filtered down to my investors," who are, Rowling says, mostly affluent professionals. She believes this attitude will change, "as more companies are charged with fraudulent practices."

Rowling says last fall's mutual fund scandal was of particular concern to her clients because most of their portfolios included mutual funds as opposed to individual stocks. She emphasizes that "corporate governance and the integrity of financial information are critical considerations when making investment decisions. …

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