New List Cites Highest Restatement Risk Companies
At a time when markets and investors are becoming reacquainted with the true meaning of risk, Audit Integrity has identified 45 US companies it says exhibit the highest risk characteristics that are not being reflected in their stock market prices.
Audit Integrity says restatement risk, litigation risk, and the risk of declines in a company’s market valuation are sufficiently different that each warrants its own predictive model. “However, they are certainly not independent of each other; the linking of surprise restatements to immediate price declines and eventual litigation is well documented.”
Therefore, Audit Integrity has created a combination “UXO List” (for “unexploded ordnance.” ) To make the list companies must:
- Be among the 20% of companies with the highest risk of financial restatement
- Have an overall very high risk profile from an accounting and governance perspective
- Have a Price/Earnings ratio of over 20 or a Price-to-Book ratio of over 2.1, indicating the market is largely ignoring these risks
The disconnect between how the market is valuing these securities and our perception of their level of risk is alarming.
While the average restatement risk of the 45 companies on the list is 3.9%, there were seven companies with a likelihood of 5% or more among them Motorola, Home Depot and Spectra Energy. According to Audit Integrity:
While a 1-in-20 chance may seem remote, damages suffered by investors in these explosions can be severe. If you hold any of the companies on this list, extra diligence is recommended.
The list, which includes some familiar blue chip names, is available to Audit Integrity subscribers.
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