Bad credit?
No credit?
Good accounting policies?
So which one doesn't fit?
No this is not a primer for the S.A.T. tests, but rather according to recent reports, a plan by global debt-rating agencies such as Moody’s, Standard & Poor’s and Fitch, to now include evaluations of a company’s accounting policies on their credit reports.
Too quick to recognize revenue? What about that tricky lease accounting? Well, read the reports! The aforementioned raters say they will devote more analysis on their credit reports to a company’s accounting practices.
Given the just-released investigation into Tyco’s accounting, which conservatively depicts it as "aggressive," the credit-rating concept is probably years overdue.
Sure, in hindsight the S&P and Moody’s of the world were as oblivious to the accounting practices at Enron and WorldCom as Mr. Magoo at a bikini contest. And they were summarily flogged both in the press and in the court of public opinion. But think of how many others might have been blunted over the years had the program been deployed earlier.
For one, having your accounting practice evaluated by entities that wield considerable market influence, may prompt accountants to get tougher with audit clients and act more like the NFL replay challenge — "Upon further review……". The subsequent reports would only note a company’s accounting practices in terms of aggressiveness and not judge whether its financials adhere to GAAP.
Naturally, the plan appears to be sound on paper but the usual questions will invariably surface — the first one being how skeptical can an agency get in rating a company’s debt, if they’re being paid by said company? Come to think of it that’s kind of like the problem faced by auditors.
Secondly, any mention of accounting practices would most likely be gleaned from discussions with a company’s hierarchy and with the auditors. But should the auditors miss something, the raters would run the same risk as copying test answers from a dim student – they would probably miss it too.
Although the agencies by their own admission are still several months from their respective programs coming to fruition, it would be a nice complement to what’s already legislated in Sarbanes-Oxley.
But make no mistake, it’s a complement to legislated reform, not a substitute.
