The Value of Integrity

Historically, corporate performance analysis has focused on a company’s financial performance - commonly known as “lagging” indicators. This “rear-view mirror” method of analysis depends on accurate financial statements - yet more than 20% of CFOs say they feel more pressure to practice aggressive accounting than they did before Enron.Despite heavy criminal penalties allowed under Sarbanes-Oxley- 56% of CFOs report intentional misstatement of financials are still possible.

More than two years after the passage of Sarbanes-Oxley, more than 1,300 people every day blew the whistle to the SEC to report financial and securities fraud-30% of which led to enforcement actions.

As financial restatements continue to rise, investors now realize “lagging” indicators alone are insufficient to measure corporate performance. With financial statements in question and 70% of the value of the S&P 500 now found in “intangible” assets (up from 20% in 1980), we are looking to “leading” indicators to perfect the science of corporate performance analysis which the media now reports “evidence is just too powerful not to be embraced by mainstream investors”.

Although the importance of “leading” indicators are recognized, no comprehensive holistic solution exists today, leaving investors and analysts placing pressure on companies to solve the problem.

Although 75% of board directors feel pressure to measure “non-financial” performance or “leading” indicators, 67% report they are unsure how to.

Sarbanes-Oxley (SOX) was expected to “solve the problem”, by creating greater transparency to mitigate risk; however, it has only proven burdensome and costly.

Front-end costs of SOX are estimated as high as $20 billion, with $5 to $10 billion in annual follow-on costs. Companies are now rethinking remaining public-causing the SEC and the US exchanges to seek solutions, or as noted by the CEO of the NASDAQ - 90% of foreign entrepreneurs choose to list their companies on foreign stock exchanges.

Incorporating both “leading” indicators and “lagging” indicators creates the first holistic view of an organization’s structural integrity; providing greater transparency, reduced cost of compliance, greater shareholder value and competitive advantage.

Putting a price on integrity isn’t easy.
But it’s pretty clear that the world is looking beyond the balance sheet.
In fact, ROI means return on integrity as much as ‘return on investment.’
Has your organization heeded Enron’s lessons?
How about your stockholders?
How do they define ROI?