Conflicts of Interest Linger

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Over the past few years, thanks to numerous scandals, most of us became aware (or more aware) of the conflicts of interest faced by many bean counters at public companies. Too often, they were pressured from above to make their companies' results look shinier than they actually were. Think that this problem has shrunk considerably under the glare of spotlights? Wrong.

In March, CFO magazine surveyed 179 finance executives and discovered the following:

• Asked to cite the causes of the scandals, 79% named personal greed, 58% blamed weak boards of directors, and 45% faulted overbearing CEOs. Unrealistic shareholder expectations, poor internal controls, and unrealistic budget targets received 34%, 33%, and 29% of votes, respectively.
  
  
• Asked whether they themselves have been pressured to employ aggressive accounting, roughly half (47%) said yes. More discouraging is that, "Of those who have felt pressure in the past, only 38% think there is less pressure today than there was three years ago, and 20% say there is more."
  
  
• Asked how confident they are in the "quality/completeness" of information that public companies make available, only 27% were very confident, while 66% were somewhat confident and 8% (nearly one in 10), were not confident.

This all adds up to more reason for us investors to worry. If those who deal most closely with the books at public companies are not very confident in them, that's troubling. If there is still substantial pressure on number crunchers to make things look better than they are, that's very troubling.

A USA Today article shed some additional light on the problem of scandals, noting that:

• According to a survey from Duke University of 401 CFOs, "78% said they would sacrifice 'economic value' to achieve 'smooth earnings.'"
  
  
• Due to many CEOs preferring their CFOs to have MBAs rather than accounting degrees, many CFOs are simply not as qualified as they could and should be. A University of Chicago accounting professor, Roman Weill, opined that, "Many, many CFOs just don't know accounting."

So what's an investor to do? Don't let yourself become complacent. Don't trust every number you see. Be especially careful with extremely "smooth" results -- somewhat lumpy results are often more realistic. Look for managements that seem to have a lot of integrity. Look for candor in communications from corporate headquarters. Callaway Golf (NYSE: ELY) has displayed candor, as has media giant Knight-Ridder (NYSE: KRI) and many other firms -- you can often get a sense of a firm's honesty level from reading annual reports and letters to shareholders by CEOs. Especially exemplary is BerkshireHathaway's (NYSE: BRK.A) (NYSE: BRK.B) Warren Buffett, who is always quite frank in his letters to shareholders.

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Longtime Fool contributor Selena Maranjian owns shares of Berkshire Hathaway.