The Math of Undertracking

[amirnetz]

nephel said:

Sarbanes-Oxley governs the content of formal financial statements, like quarterly and year-end reporting and SEC filings. I do not recall any part of it that regulates press releases in general. i haven't read it in a long time, and dont work in a capacity that requires me to know it so it could be there, but could you tell me what section it is in? 

With respect to Enron... 

SOX is a hugely complex law, and very few can explain it well. SOX was enacted after a set of accounting scandals (with Enron being the most famous of them) and it dealt with a range of topics including tightening the rules on financial reporting and the relationships between industry analysts and companies. There were a bunch of bad things going on with Enron. One of them was the relationship between Enron and the Analysts community.

If you recall, a bunch of analysts were having buddy-buddy relationships with the Enron executives and Enron discriminated with the information it supplied to various analysts. Analysts which were friendly to Enron got information that other did not get. It was not illigal at the time (the Analyst could not use the information for insider trading). It was just dirty and caused a conflict of interest for the Analyst. As a result, in order to get the fresh information from the company the friendly analysts recommeded the stock and caused it to be pumped up.

To ensure that such unethical relationships do not develop again, SOX governs the way finanancial and business performance information is distributed in general, not just in financial statements. I cannot point you to the portions of the law (again, it is hugely complex) but I can explain the changes that we had to go through after the law was enacted. As I mentioned somewhere before, part of my day job is to work with the press and industry analysts - so I know what the practical consequences of SOX were. So here are a couple of the rules:

1. Business performance information cannot be dirtibuted privately. I cannot have a one-on-one with an analyst and provide any business performance information that is not already public domain.
2. All business performance information must be distributed through mass media, public analyst calls, mass forums. PR releases or keynotes or large forum engagements.
3. All business performance information to be published must be carefully verified and its release must be approved by an executive.

As you can see, there is no way a PR guy can just "make up" business performance information. This would be providing a false guidance to the market and the company could be held liable. Any business performance information (such as the number of units shipped of product X) must be verified and approved by the financial controls of the business and the executive in charge.

BTW, this is also why you'll see the companies often reffer to 3rd party data in their press releases. "According to NPD the October sales of Xbox...". If the source is quoted to be a 3rd party then the companies are not liable as to the accuracy of the data and the PR/marketing functions can use it as they please without any executive approval.