The Sarbanes-Oxley Act, along with the Securities and Exchange Commission's accelerated reporting guidelines, appear to be improving the accuracy of companies' earnings forecasts, according to a report by management consultancy firm Parson Consulting.
The percentage of companies among the Standard & Poors 500 stock index that missed analysts' earnings-per-share projections by at least 10 percent fell to 29.7 percent in the 2004 third quarter -- the lowest level since Parson began the quarterly study in the first quarter of 2003.
According to Parsons, the SEC accelerated reporting deadlines and federal Sarbanes-Oxley Act -- which shortened the timeframe in which companies must report their quarterly and annual earnings to the SEC, while demanding transparency and accuracy of financial information -- are having a beneficial effect. This need to report more quickly to the SEC is leading companies to streamline their processes and employ more sophisticated financial systems that improve the accuracy of forecasts, Parson experts say.
"One reason a sizable number of earnings 'misses' occur is because companies' finance functions are saddled with outdated or non-comprehensive financial management infrastructures, and cannot provide accurate information in a timely manner," notes Toni Hicks, senior vice president of practices at Parson Consulting. "With more streamlined processes and integrated systems, Wall Street will get better data and that should contribute to more 'hits' and fewer 'misses' during earnings season."
However, Parsons noted that the percentage of companies that fell short of their EPS projections hit an 18-month high, rising to 22.5 percent in the latest period from 16.4 percent in this year's second quarter -- the highest percentage of negative misses since the survey began. The percentage of wide-margin underperformers rose to 9.1 percent in the third quarter, the highest percentage since 9.2 percent in the first quarter of 2003. Parson cited higher-than-expected energy and raw material costs as a principal cause for missed earnings estimates during the first quarter. The study examined public data for all of the available quarterly results of S&P 500 companies as of Nov. 10, 2004.
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