The three major ratings agencies are taking steps to address the roles of corporate governance and accounting practices in the credit rating process. The action is a direct consequence of the recent spate of corporate blow-ups. "Some people have suggested that corporate governance is beyond the legitimate part of credit analysis, but poor corporate governance and aggressive accounting often go hand-in-hand," says Christopher Mahoney, senior managing director at Moody's Investors Service in New York.
Moody's is creating a team of corporate governance specialists and forensic accountants to assist credit analysts. "I think we've concluded we would have done a better job with the recent debacles if we had a team like this in place. Would we have discovered the fraud? No. Would we have smelled something? Yes," says Mahoney.
Standard & Poor's has had a corporate governance group in place for roughly two years and plans to increase its marketing efforts for the group. In addition, the agency is conducting a transparency study for S&P 500 companies as well as many in continental Europe, says Steve Dallas, managing director of governance services in London. S&P has formed an accounting task force to study difficult accounting issues and how options are expensed.
Companies volunteer to go through S&P's corporate governance rating process, after which they are given a corporate governance score. "The frustration is that it takes time for companies to go through the analysis and some remain cautious about announcing their scores," says Dallas.
At Moody's the new corporate governance specialists and forensic accountants will work as members of the credit teams and contribute to credit analysis and research as well as attend issuer meetings. Mahoney says the new accounting hires will pay special attention to off-balance sheet transactions.
Ian Linnell, managing director of the credit rating policy group at Fitch Ratings in London, says the agency is endeavouring to improve its ratings methodology, rather than expand into new business areas. Fitch has added analysts to its centralized credit policy group, which monitors credit default swap spreads, bond spreads and equity prices to see what central signals are coming from the markets, he says. "With 3,000 to 4,000 entities to work with, having a handful of people to look at corporate governance and accounting practices is just window dressing. It isn't realistic to believe that a handful of accountants and corporate governance specialists will do a better job than the armies of auditors that crawl all over companies," he says.