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S&P Adopts New Standards to Evaluate Corporate Earnings - 2002-05-14

One of Wall Street's oldest and most-respected market analysis firms is changing the way it examines corporate earnings.

What stock market investors know about any given company will determine whether they buy, hold or sell that company's stock. They depend on market analysts at firm's like Standard & Poor's for this information.

Kenneth Shea is the director of Global Equity Research at the 142-year-old Standard and Poor's. He says the investment community is increasingly making its "displeasure with liberal accounting practices" known. Mr. Shea says "S&P," as it is commonly called, decided to address these concerns before federal regulating bodies.

"It is our belief that they were working a little bit too slowly, quite frankly, to make an impact. We think this is a dire situation," he explained. "The investment community has lost faith in the corporate earnings reports that are out there. We think the time to act is now."

S&P is publishing a new set of standards it will use to evaluate corporate operating earnings of publicly held companies. Mr. Shea says that the new measures of corporate earnings are the result of discussions with securities and accounting analysts, portfolio managers and academic research groups that actually began in August of 2001. He adds that while every one involved in the discussions agrees that accounting is more of an art than a science, they also agree that more transparency about the accounting process is necessary to protect investors.

"If companies are making certain assumptions about their earnings, they should be disclosed in a timely manner, and a forthcoming manner," he emphasized. "I do not think they are doing the public the service they should be by holding back information that is important for investors to know. Particularly in light of some of the damaging news that we have heard over the last few months, Enron being one of them."

Could new standards like these have prevented scandals like that which toppled Enron? According to Standard & Poor's chief executive officer, Leo C. O'Neill, the answer is "no." He noted that such safeguards only have an affect on companies that are "honest to begin with."