Shattered Trust

Will the government's accountability plan restore investor confidence?

been reassuring clients, “making sure they know we’re looking at the books, looking for anomalies, and delving into more intrinsic analysis.”

Dennis Kroner, president of Pitt, Ryan & Linnear, an accounting firm in Chicago, says that a recently-passed law requiring CEOs and CFOs to personally sign off on corporate financial statements will have a major impact. “Most CEOs don’t have an accounting background. They’ll want some assurance that these statements aren’t misleading.”

That assurance, according to Kroner, may come from independent directors — but only if the process is revised dramatically. “Today,” he says, “some directors sit on many boards, in addition to holding a full-time job. A week or so before each board meeting, a director might get a 200-page packet of materials describing what’s on the agenda.”

Kroner believes government measures will help to restore investors’ confidence, “but it will take awhile. It will probably be a year or so before professional directors are sitting on many boards and another couple of years before investors realize what a difference [the directors] make, in terms of corporate reporting. This issue is not going to go away quickly,” he says. Capital Management Group’s Baldwin, on the other hand, says the public will need an example made of a corporate executive before trust is restored — a CEO like Enron’s Kenneth Lay; Tyco’s Dennis Kozlowski; or WorldCom’s Bernard Ebbers sentenced to hard time if found guilty of criminal activity.

Rex Jackson, a money manager with Integrity Planning, a subsidiary of a credit union in Redlands, California, agrees that these issues will bedevil investors for some time to come. “Companies are still doing things the old way,” he says. “Any improprieties that are under way now won’t come out until 2003.”

Eventually, tougher oversight and harsher penalties will have an effect. “The scandal headlines will become fewer and farther apart,” says Jackson. “People have short-term memories once an issue is off the front page.”

In the near term, though, Jackson is far from bullish. “We follow an active asset allocation model that monitors current market conditions,” he says. “Now that model is telling us that our clients should be out of stocks with their money in cash. That could change quickly, though.”

In addition to cash, Jackson recommends that clients hold alternative investments such as real estate investment trusts (REITs) and managed futures funds, which can invest in a broad range of commodities, currencies, stock indexes, etc.

Market historian and money manager Steven Leuthold, who claims that stocks are still overvalued, suggests a slightly different tack: Investing in the stock market in stages while increasing diversification to limit exposure.

But for now, average investors like Booker remain worried about committing additional funds to stocks. “Now, conservative is the key word when it comes to investing. I don’t want to lose money I’ll need in retirement,” he says. As long as investors continue to worry and stay on the sidelines, it’s unlikely the market will see any sustained upward movement.

Adelphia Communications Corp.’s stock plunges $3.69, or 18%, to $16.70 due to reports that

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