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CFOs Feel a Groove Coming On

Finally they see enough signs of economic recovery to be confident that the new year will be brighter. Also: do commercial banks illegally tie corporate credit to investment-banking services?; tax attorneys are bolting from the Big Four. Staff, | US
December 1, 2003

CFOs feel a groove coming on. They finally see enough signs of economic recovery to be confident that the new year will be brighter. Positive employment numbers released in November and CFOs' own intentions to increase hiring contributed to expectations for improvement in 2004. In fact, finance chiefs are more hopeful about the prospects for the U.S. economy over the next year than they have been since the quarterly CFO Global Confidence Survey was first conducted in June 2000.

According to the current survey, 71 percent of U.S. finance executives say they are either "confident" or "very optimistic" about the domestic economy over the next year. That's up from 58 percent holding positive views last quarter.

CFOs base this optimism on their hopes for better profits and revenues in their own companies. A solid 69 percent expect to improve profitability next year, while 79 percent think sales will increase. About 42 percent say they expect capital spending to increase in the next quarter, and more than half of those say they will increase spending by more than 5 percent. Only 8 percent expect to decrease capital spending next quarter.

Perhaps even more telling is that, for the first time since 2001, respondents did not list weakness in the local and global economies as one of their top three concerns. In this reporting period, increased competition was named the chief concern, followed by the cost of benefits and the need to attract and retain employees.

That third concern suggests the end of what has been, so far, a jobless recovery. In fact, 45 percent of CFOs say they will increase hiring over the next six months (up from 37 percent last quarter), and another 46 percent expect to keep the ranks of employees at the same level. That sentiment is supported by unemployment data released in November that showed a better-than-expected jump in new jobs — the third consecutive monthly increase.

Still, their cheerfulness is laced with a hint of skepticism. Less than half (46 percent) think a broad recovery is already under way. Another 24 percent expect it to begin in the first half of 2004, and 23 percent say it could be the second half of 2004 or later.

And respondents have some lingering hesitation about declaring the global economy healthy, too. Many U.S. CFOs (50 percent) still define their outlook toward the global economy as "neutral," and only 40 percent say they are confident about its prospects. Their counterparts overseas weren't much more enthusiastic: 44 percent of European CFOs hold positive outlooks on the global economy, and 49 percent of Asian CFOs agree. But Asia's finance chiefs are much more bullish about their region — 84 percent say they are optimistic about their economy. In Europe, CFOs are still not ready to join the party; only 35 percent are confident about their economic prospects.

With the potential for a hiring wave to hit here, finance chiefs expect to spend more on compensation. More than 66 percent say they will boost salaries, and 39 percent say they will increase bonuses. In fact, spending will increase in most areas, with insurance (65 percent), benefits (63 percent), and travel (46 percent) leading the way.

The generally rosy outlook comes with a caveat: U.S. CFOs are still troubled by the federal deficit, which could push interest rates up. Nearly a third of respondents say they are "very concerned" about the potential economic impact of a rising federal deficit, and another 56 percent are "concerned."

The Ties That Bind
Do commercial banks illegally tie the availability of corporate credit to purchases of investment-banking services? Perhaps, concludes a recent report by the General Accounting Office.

The GAO found little documentary evidence of tying, because, not surprisingly, "credit negotiations are conducted orally." It also noted that companies are reluctant to report tying, both for fear of retribution and because they aren't sure when it's illegal.

Yet the 56-page report recommended improving the enforcement of antitying laws and was critical of a recent joint study by the Federal Reserve and the Office of the Comptroller of the Currency, which found no unlawful tying and concluded that banks had taken adequate steps to prevent it. The GAO said the bank regulators failed to broadly analyze bank transactions for evidence of tying and didn't talk to corporate borrowers at all.

"We were surprised they could come to that conclusion without talking to any corporate practitioners," says James A. Kaitz, CEO of the Association for Financial Professionals. In March, an AFP survey of 700 members found that 56 percent of companies with more than $1 billion in revenues had been denied credit or had their credit terms changed because they didn't award the bank other financial business.

Tying credit to traditional banking services is not illegal, and the AFP drew no legal conclusions from its survey. However, of the five services that companies said their banks had tied to credit availability, only one, cash management, was not an investment-banking service.

Still, the fact that many corporate borrowers don't understand when tying is legal and when it isn't is a challenge for federal regulators, the GAO report noted. And recently released guidance from the Fed, intended to clear up the confusion, may have made things worse. It noted that banks may make credit contingent on the purchase of other products — including investment-banking services — if the customer is offered a "meaningful choice" that also includes one or more traditional bank products.

But what if a customer already buys those traditional products elsewhere? "That's the problem," says Kaitz. In that case, he says, the bank shouldn't be allowed to deny credit if the company declines the additional products. The meaningful-choice concept, he says, needs to be better defined. "It is a whole new term of art that the Fed has come up with."

When Tax and Audit Don't Mix
The lawyers are leaving — again. Lured away from law firms in recent years by the roster of top corporate clients at the Big Four accounting firms, tax attorneys now are finding those coveted clients scared off by the Sarbanes-Oxley Act of 2002. As a result, some lawyers are now bolting the Big Four and returning to traditional law practices.

"Sarbanes-Oxley hasn't precluded accounting firms from doing tax services, but it certainly has affected the breadth of services they can do for their audit clients," says attorney Michael F. Solomon.

In September, he and six other tax lawyers left PricewaterhouseCoopers after just two years to join the Washington, D.C., office of law firm Shaw Pittman LLP.

Although Sarbox allows accounting firms to provide tax services, they are not permitted to provide advocacy work or legal services to audit clients. That means they can't represent those clients before the Internal Revenue Service or in tax court. And even tax services that are not specifically prohibited to audit clients must still be approved by a client's audit committee.

Apparently, many audit committees prefer not to make that call. "There seems to be a continuing drumbeat that auditors who provide tax services to audit clients are not independent — even though Congress and the [Securities and Exchange Commission] carefully considered the issues and concluded to the contrary," PwC CEO Samuel A. DiPiazza Jr. testified at a September hearing of the Senate Committee on Banking, Housing, and Urban Affairs. He said PwC has seen about a 20 percent drop in audit client using its U.S. tax practice, adding, "evidence shows that the trend is continuing."

"We hope it's a trend," says Barbara Roper, director of investor protection at the Consumer Federation of America, who was critical of Sarbox and the SEC for not simply banning auditors from providing tax services. "Given some of the recent scandals — Sprint comes to mind — careful audit committees are concluding what Congress and the SEC should have concluded, which is that tax-planning services are fraught with potential conflicts."

Stephen B. Huttler, managing partner at Shaw Pittman, says he's received a "deluge of résumés" from lawyers at the Big Four, and he plans to continue expanding his firm's tax practice.