June 27, 2002 - "Even in the context of some egregious recent restatements, the WorldCom announcement really does establish an unfortunate new low in terms of bad accounting," says James Owers, finance professor at Robinson College of Business at Georgia State University. "While the capitalization of operating expenses can provide an area for legitimate judgment in how the demarcation is made, $4 billion over five quarters would seem outside the range of reasonable judgment even for a company as large as WorldCom."
Owers has been researching the causes and financial consequences of accounting restatements for the past 10 years. His most recent study which analyzed the market response to different categories of accounting restatements found "statistically significant negative revaluations."
Recently published in the International Business & Economics Research Journal, "The Informational Content and Valuation Ramifications of Earnings Restatements," (co-authored by Ronald Rogers of the University of South Carolina and Chen-Miao Lin of Georgia State University) examined nine categories of restatements including acknowledged fraud.
According to Owers restatements are not a recalibration of investors' expectations, but a change in results previously announced to be the "real numbers" -- after the fact, and supposedly final.
"Thus, they are dramatic for several reasons. The previous hard numbers were incorrect. Not surprisingly, that influences and changes stock values, and the recent levels of restatements raise questions about the caliber of management, and the efficacy of the auditing profession," said Owers. "The debate regarding whether the accounting profession is an effective self-regulating body, discharging the immense responsibility it shoulders is understandable in light of the recent Enron and Anderson fiasco. This all clearly has debilitating consequences for investor credibility and raises questions regarding whether the investment playing field is level."
"This loss of credibility has become a cumulative process, with spill-over effects," continued Owers. "As the market digests the WorldCom announcement, it is notable that other companies where accounting issues have been raised, such as Tyco, have experienced further notable drops in their stock prices. Investors rationally have raised their level of skepticism regarding the 'quality of earnings.'"
Owers is available for comment on the WorldCom issue as well as his study. He can be reached directly at 404/413-7320 or 617/495-3495. He can also be reached via email at owers@gsu.edu.
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The J. Mack Robinson College of Business is one of the nation's top business schools. The College's Flex (part-time) MBA program has been listed in the top ten by U.S. News for the past six years. Business Week magazine ranked the College's Executive MBA program among the top 20 in the world and Forbes rated Robinson in the top 20 for return on investment for regional schools. Success Magazine ranks the College's entrepreneurship program among the top 50 in the nation. Georgia State University's Robinson College of Business has an enrollment of over 8000 students and is located in downtown Atlanta.
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Robinson College of Business
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