Alleged Overstatement of Corporate Profits Could Lead to SEC Regulation

A recent article in the New York Times (Louis Uchitelle, "Corporate Profits Are Tasty, But Artificially Flavored," NY Times, Sec. 3, p. 4, March 28, 1999) suggested that many people believe - and most importantly members and staff of the Securities and Exchange Commission (SEC) believe - that there has been a decline in the quality of financial reporting by U.S. corporations. The article suggests that in a bid to keep corporate earnings (and related stock prices) high, Corporate America has begun to resort to certain questionable accounting practices.

Examples cited in the article include not listing executive stock options as costs, overstated profits associated with large corporate restructuring charges, and manipulation of depreciation charges and research and development costs.

Should this perceived trend continue, it is foreseeable that the SEC could step in through regulation to require a change in current corporate accounting practices. Such changes could have a potentially significant impact, at least in the short term on corporate balance sheets and investor confidence. Therefore, this may be an issue to watch, such that the time may be ripe for companies to undertake their own internal assessment of accounting practices, in the event the current regulatory climate should become less favorable.