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Has the Time Come for Real Reform?

by Dennis Jacobe

Clearly, the American investor has a lot to be concerned about when evaluating the current investment climate. Surprisingly, however, the biggest worry for U.S. investors is not the war on terrorism or the conflict between the Israelis and the Palestinians. Instead, as new Gallup/UBS Index of Investor Optimism -- U.S. poll data (May 1-16)* show, investors see the issue of questionable accounting practices as the most damaging to the current investment climate.

The good news is that the government can, and should, take action to reassure investors. Real reforms can be adopted by Congress, the SEC, and the Financial Accounting Standards Board (FASB). While such reforms are extremely difficult to institute, they are clearly within the control of U.S. policy-makers.

The bad news is that the seriousness of this situation is being overshadowed by international crises. War and turmoil attract widespread public attention, while accounting complexities and Wall Street's research ethics do not. In turn, a lack of intense public pressure makes immediate and effective reforms highly unlikely. Unfortunately, the accounting cloud hanging over Wall Street could easily do serious damage to the outlook for the U.S. economy.

Accounting Issues Hurting a Lot

Seven in 10 American investors (71%) believe that questionable accounting practices are somewhat (41%) or very (30%) widespread across the U.S. business community. Even more importantly, more than eight in 10 American investors (84%) believe that questionable accounting practices are hurting the U.S. investment climate a lot (60%) or a little (24%). Most significantly, however, 40% of U.S. investors say that accounting concerns make them less likely to invest in stocks and stock mutual funds.

American investors are also concerned about the Israeli/Palestinian conflict, with 73% saying it is hurting the U.S. investment climate a lot (39%) or a little (34%). Similarly, 66% of investors say the war on terrorism is hurting the U.S. investment climate a lot (39%) or a little (27%). Nearly as many investors (62%) say that the issue of conflicts of interest between Wall Street firms' research departments and their investment banking activities are hurting the investment climate a lot (28%) or a little (34%).

Investors Want Action

Questionable accounting issues continue to worry U.S. investors to such a degree that they are unusually supportive of federal government action. Two out of three investors (68%) say they believe that the federal government should enact stricter accounting regulations.

In the case of potential conflicts of interest between Wall Street firms' research departments and their investment banking activities, a plurality of investors would also support government action. Nearly half (48%) say they would favor a law that would prohibit Wall Street firms from providing both research coverage and investment banking services to the same company. More than one out of three investors (38%) would oppose such a law.

*These results are based on telephone interviews with a randomly selected national sample of 1,002 U.S. investors, aged 18 and older, conducted May 1-16, 2002. For results based on this sample, one can say with 95% confidence that the maximum error attributable to sampling and other random effects is ±3%. In addition to sampling error, question wording and practical difficulties in conducting surveys can introduce error or bias into the findings of public opinion polls.


Gallup https://news.gallup.com/poll/6100/Has-Time-Come-Real-Reform.aspx
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