The Wall Street Journal-20080213-Ahead of the Tape

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Ahead of the Tape

Full Text (532  words)

After Losses,

Auditors Take

A Hard Line

Many big Wall Street firms were asleep at the switch in the years leading up to the credit crisis. At least another group -- the auditors -- seems to be minding the store.

They fell down badly during the tech-stock bubble, but their standards seem to be pretty tight these days.

The most recent evidence: The apparently hard line taken by American International Group Inc.'s auditor, PricewaterhouseCoopers, when it came to how the insurer valued credit default swaps -- which are contracts AIG wrote as insurance against default on securities sometimes linked to subprime mortgages. That resulted in AIG upping its loss estimates for these contracts by about $3.6 billion, a move that shocked investors and sent its stock plunging.

Markets tend to be healthier when auditors insist that companies value their assets conservatively. The result: Investors can place more faith in the numbers they are getting.

There's other evidence that auditors have been on the job. Companies aren't restating previously reported results as much as they used to. Restatements fell in 2007 for the first time in the post-Enron era, according to separate studies by research firms Glass Lewis & Co. and Audit Analytics.

Audit Analytics said the number of restatements in 2007 was 1,237 compared to a peak of 1,801 the year before. Glass Lewis said the number of companies restating fell to 1,172, compared with 1,346 in 2006. Back in 2001, as the last financial crisis gathered steam, there were only about 600 restatements.

The average hit to profit caused by a restatement also fell to about $3.6 million in 2007, according to Audit Analytics. That compared with $17.8 million in 2006 and $21.3 million the prior year.

These numbers might not seem like much when big banks are recording billions of dollars of losses almost every week for their bets on mortgage-linked securities. Still, the decline in restatements, which are akin to a product recall of financial statements, mean investors might not need to add overly rosy accounting to their list of worries this time around.

Retailers Set to Continue

A Downward Sales Trend

Brace yourself for some more bad news about consumers.

Retailers and car makers have already reported dismal sales for the month. When the government reports its tally of retailer sales today one of the few numbers pointing up will likely be sales at gasoline stations, where prices keep rising.

Overall retail sales are expected to be reported down slightly for January from the month before, after a December retreat from November. It would be the first back-to-back monthly decline since 2003, another troubling hint that a recession has already arrived.

The longer-term trend in sales has moved in the wrong direction; year-over-year growth has slowed from 5% last September to 4.1% in December.

Gift cards often offer a January boost, but that might not be the case this time. Many retailers have reported that their customers are either sitting on them or using them to buy staples such as bread and cigarettes. Affluent consumers also seem to be reining in their spending, according to reports by Nordstrom and others.

-- Mark Gongloff

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