YouTube No Substitute to Press Release to Restate Earnings
CFOs are a pretty conservative lot, when it comes to the march of investor relations toward social media. In the case of one relatively new type of dissemination --- video --- to get out the word about that most sensitive of disclosures --- an earnings restatement --- it seems it may pay to stick with the good old press release.
"Announcing a restatement online via video is likely to benefit firms only when top management apologizes for the restatement and accepts responsibility by making an internal attribution for the error," according to a study in the March/April issue of The Accounting Review. "When management apologizes but denies responsibility by making an external attribution," the study goes on, "announcing a restatement online via video is likely to have unintended negative effects on investors."
The results in the magazine, published by the American Accounting Association, may not be too surprising. After all, as the AAA says in a press release, that "for all its vaunted powers, video can present special hazards for a company when those powers are most needed -- namely when there is bad news to report."
Digging Into the Details
But the degree of work that went into the research, and some of the details with in the findings, are worth considering.
"Managing the response of investors to events as negative as restatements is a formidable undertaking. Doing so via video over the Internet makes it all the more formidable," according to Frank D. Hodge of the University of Washington's Foster School of Business, who carried out the study with W. Brooke Elliott of the University of Illinois at Urbana-Champaign, and Lisa M. Sedor of DePaul University.
The study -- titled "Using Online Video to Announce a Restatement: Influences on Investment Decisions and the Mediating Role of Trust" -- note that the General Accountability Office has estimated that restatements reduced market capitalization of companies by $36 billion over a three-year period.
Restatements have a long tradition of causing difficulties for investors -- a tradition that grew along with the number of restatements in the years after Sarbanes-Oxley took effect a decade ago.
The study in The Accounting Review, however, makes a start at quantifying the damage, both in cases of the company taking responsibility, and cases of it placing responsibility elsewhere. Asked to gauge the trustworthiness of CEOs accepting responsibility via video for their companies' flawed financial statements, for example, professional managers gave the CEOs an average rating of 6.15 on a one-to-seven scale (with seven being highest.) Asked to rate a chief who blames external accountants, the managers bestowed an average of 4.0.
Admitting Versus Ducking
Compared with similar announcements made in text format only, there was "no such striking discrepancy in ratings," according to The Accounting Review study. The rating was 4.75 for a CEO who accepted responsibility, and 4.55 for one who laid the blame elsewhere.
What was the sentence that got videotaped CEOs into trouble? It read: "We are not responsible for this error because we relied on the advice of external lease accounting experts when preparing our financial statements." The sentence that accepted blame: "We are fully responsible for this error because we relied on the advice of our internal lease accounting expert when preparing our financial statements."
To explain how that single sentence, on a rather technical matter of lease accounting had such an impact in video, the professors identified trust as a key factor, combined with what the press release calls "the magnifying power of video."
To Apologize, or Not?
Said the study, "Restating financial statements is inconsistent with investors' positive expectations regarding an investee firm and its management, thus damaging investor trust.... Although excuses can be effective, individuals who deny responsibility for a failure (i.e., excuse their behavior by blaming others) risk being viewed as more deceitful and as possessing lower character than are individuals who accept responsibility for the failure. Beliefs about another's character are key components of trust, and once violated trust is difficult to repair. Even when the violator issues an apology, accepting responsibility by making an internal attribution repairs trust to a greater extent than does denying responsibility by making an external attribution."
The article asks whether the difference in investor responses suggests that companies should take the blame -- thus reaping the video's benefits for doing so -- even if the a restatement really was an outsider's fault. According to the press release, "Prof. Hodge concedes that this can be a tempting option, given that video admissions of fault proved such an effective way of minimizing loss of trust among participants in the study."
He adds, however: "Clearly there are ethical and legal reasons not to be that devious. What this study points to is the need to be alert to the powerful effect video has when people's feelings come into play. If outsiders are to blame for your company's restatement, by all means say so, but you'd better make sure you document it and make a strong case for it.
"Plus, for good measure, you still probably need to apologize for letting it happen."