Who can you trust today? It's a more crucial question than ever now, across the business world. To find the answer, Forbes turns to Audit Integrity, an independent financial analytics company based in Los Angeles, which looks beyond the raw data on income statements and balance sheets to assess the true quality of corporate accounting and management practices.
As early as August 2005, Audit Integrity's proprietary rating system signaled potential problems at Lehman Brothers. In December of 2005, it gave American International Group a significant downgrade.
For the third year, Audit Integrity has provided Forbes with a list of companies that are at the other end of the spectrum from the beleaguered firms making many of today's headlines. Audit Integrity finds that its 100 most trustworthy companies have consistently shown transparent and conservative accounting practices and solid corporate governance and management. These companies do not play games with revenue and expense recognition, or with asset valuation.
Audit Integrity's evaluation also penalises companies for high levels of management turnover or substantial insider trading relative to their corporate peers. After all, good housekeeping practices leave companies better prepared to handle an economic downturn, especially one as severe as right now.
To create the list, Audit Integrity scans more than 8,000 companies traded on US exchanges. Every quarter, it assigns each company an accounting and governance risk score (AGR) based on proprietary modeling designed to identify practices that historically have had a high correlation with increasing shareholder risk.
Audit Integrity rates the 15 per cent of companies in its universe with the highest AGR scores as "conservative" and the 10% of companies with the lowest scores as "very aggressive." Companies in between those extremes receive either an "average" or "aggressive" rating.
Audit Integrity claims that it has established a direct correlation between its AGR assessments and the likelihood of negative events such as class-action litigation, Securities and Exchange Commission enforcement actions, financial reporting delays, bankruptcy filings and poor stock price performance.
How did the 2008 list of Most Trustworthy Companies fare on Wall Street? Whether or not we include three acquired companies--Midland Company, Allied Waste Industries and Centerplate--last year's list fell an average of 36 per cent vs. 39 per cent for the S&P 500.
As in previous years, Audit Integrity groups its 100 Trustworthy Companies into three sublists, according to market capitalization. In this year's crop, 14 mid- and small-cap companies received the highest AGR score, an 88. The two large-caps to come closest, Canadian food processor and distributor George Weston, and oil-refiner Hess, each earned an 86.
To qualify for the roster, the 100 companies had to have market caps of $200 million or more at the time Audit Integrity prepared the list, AGR ratings of "conservative" or "average" over each of the last four quarters and no amended filings with the Securities and Exchange Commission or material restatements over the last year. They also had to rank high in Audit Integrity's Equity Risk Ranking, which indicates a positive forecast for equity returns.
