CHAIRMAN ARTHUR LEVITT
SECURITIES AND EXCHANGE COMMISSION
THE "NUMBERS GAME"
NYU CENTER FOR LAW AND BUSINESS,
NEW YORK, N.Y.
SEPTEMBER 28, 1998
Thank you very much. Dean Daly, Dean Sexton and to everyone gathered this evening, thank you
for welcoming me tonight. I am honored to be here on such an auspicious evening for both NYU
and Bill Allen.
The creation of the Center for Law and Business recognizes an important truth: we cannot
continue to view the worlds of business and law as parallel but separate universes. And NYU could
not have selected a more qualified or thoughtful individual than Bill as its first director. His
leadership of the Delaware Court of Chancery -- acknowledged as the nation's most influential
arbiter of corporate law -- confirmed his reputation as a great thinker who effortlessly bridges the
worlds of law and business. I've heard from friends on Wall Street that it's a far less stressful
experience to hear Bill lecture in front of a classroom than from his former seat on the bench.
Seven months ago, I expressed concerns about selective disclosure. Through conference calls or
embargoed press releases, analysts and institutional investors often hear about material news
before it is made public. In the interval, there is a great deal of unusual trading. The practice had
been going on for a long time. And, while everyone was aware of it, and most were extremely
uncomfortable with it, few spoke out. As the investor's advocate, the SEC did and we will continue
to do so.
Well, today, I'd like to talk to you about another widespread, but too little-challenged custom:
earnings management. This process has evolved over the years into what can best be
characterized as a game among market participants. A game that, if not addressed soon, will have
adverse consequences for America's financial reporting system. A game that runs counter to the
very principles behind our market's strength and success.
Increasingly, I have become concerned that the motivation to meet Wall Street earnings
expectations may be overriding common sense business practices. Too many corporate
managers, auditors, and analysts are participants in a game of nods and winks. In the zeal to
satisfy consensus earnings estimates and project a smooth earnings path, wishful thinking may be
winning the day over faithful representation.
As a result, I fear that we are witnessing an erosion in the quality of earnings, and therefore, the
quality of financial reporting. Managing may be giving way to manipulation; Integrity may be losing
out to illusion.
Many in corporate America are just as frustrated and concerned about this trend as we, at the
SEC, are. They know how difficult it is to hold the line on good practices when their competitors
operate in the gray area between legitimacy and outright fraud.
A gray area where the accounting is being perverted; where managers are cutting corners; and,