The 24/7 Wall St. Fifty Least Trustworthy Companies in America

24/7 Wall St., working together with independent research firm Audit Integrity, has compiled a list of the companies with the least transparent governance and accounting practices. The list is based on publicly available information updated for the year ending 12/31/2009. Shares of all the companies on this list are publicly traded on U.S. stock exchanges. This list is based on the same methodology that is used to produce The 100 Most Trustworthy Companies, as published by Forbes.  In our opinion, the companies with the lowest transparency scores are the least trustworthy companies in America.

“Least Trustworthy” refers to companies that have accounting and governance practices that pose risks to the company – and as a result, to shareholders. These practices include whether financial results may be misrepresented in public disclosures. According to Audit Integrity, “Accounting and governance practices have been shown to be highly predictive of negative events such as SEC enforcement actions, class action shareholder litigation and severe stock loss.”

Audit Integrity’s analysis and models, covering all U.S. publicly traded companies, are designed to address the need for transparency in publicly filed documents. This goal is achieved by using objective and quantitative information to find potentially fraudulent activity. In the past decade, over 500,000 Audit Integrity Accounting and Governance Risk Rating Scores (AGR®) have been assigned to these companies in the fiscal quarters of this sample period.

To report which firms have the greatest shareholder risk, Audit Integrity’s methodology breaks companies down into four groups. The AGR scores range from 0 to 100, worst to best and are classified as follows:

• Very Aggressive – highest-risk companies, comprising approximately 10% of the total universe;
• Aggressive – high-risk companies, comprising approximately 25% of the total universe;
• Average – moderate-risk companies, comprising approximately 50% of the total universe; and
• Conservative – low-risk companies, comprising approximately 15% of the total universe.

Audit Integrity’s analysis has proved to be a highly accurate forecasting tool for corporate risk. It identified problems at Lehman Brothers, American International Group, Washington Mutual, and Huron Consulting. James Kaplan, Audit Integrity’s Chairman, says his research’s ability to detect risk with accuracy is because the analysis focuses on forensic data. “Companies that are obfuscating results or misleading investors use a number of strategies to achieve this. Those strategies may involve revenue manipulation, asset overvaluation, and/or capitalizing expenses,” Kaplan says. “We examine over 100 metrics in order to assess the level of transparency.”

The 24/7 Wall St. list focused on the lowest scores, which range from 1 to 5. These are the worst offenders in the “Very Aggressive” segment.

The list is in two segments, each composed of  25 companies. The first list covers firms with market caps over $1 billion. The second list covers companies with market caps between $1 billion and $200 million.

Based on the events of the last two years, it is not surprising that several large banks are on the list-Bank of America, Citigroup, Wells Fargo, and Goldman Sachs. There are also several companies in the drug and pharmaceuticals industry-Merck, Pfizer, and Warner Chilcott plc.

According to Kaplan, the ultimate value of the list is to avoid negative surprises that result in defaults, litigation and price drops.

The 25 Least Transparent Large-Caps

The 25 Least Transparent Small-Caps

Douglas A. McIntyre