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SPRING 2003

INVESTING FOR GROWTH

Patricia McConnell: Accounting Maven


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Like most investment banks, Bear, Stearns & Co. (BSC ) trots out top analysts to visit valued clients or speak at industry conferences. But until the collapse of Enron Corp., Bear accounting analyst Patricia McConnell wasn't exactly a box-office draw. "You used to have to coax clients to listen to an accounting presentation," she recalls. "They'd rather be at the dentist."


Nowadays, clients hang on McConnell's every word. She warns them that scandals are not over, but they shouldn't assume that every company is another Enron. Few, she stresses, engage in outright fraud. More commonly, they employ generally accepted accounting principles to obscure their true financial health. In that vein, McConnell says, her clients' two top accounting concerns right now are how employee stock options and pension accounting distort earnings.

Accounting rules don't require companies to expense options. That means earnings look rosier than they really are, especially at tech companies, where options are common. McConnell figures the companies in the Standard & Poor's 500-stock index would have reported 20% lower earnings on average in 2001 if they had expensed options. In tech, earnings would have been 35% less.

Companies also boosted profits by counting bull-market pension-plan gains. But that trick is played out, and pensions will become a drag on earnings this year. Still, McConnell takes a long-term view when looking at companies' pension plans, since they're affected by short-term fluctuations. "During the '90s, investors wound up overvaluing companies [because of pension accounting]," she says. "Now it's going to bring valuations down even more than they should be."

MARCH 24, 2003




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