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CFOs Remain Optimistic on Economy
NEW YORK -- Chief financial officers' optimism about the economy and their own companies' financial prospects remains high, virtually unchanged from last quarter, despite continuing high oil prices, relentless increases in health care costs and added expenses required to protect their companies from a possible terrorist attack, according to the September CFO Outlook Survey conducted by Financial Executives International and Baruch College's Zicklin School of Business.Oil prices are hurting earnings at about one out of five companies (19%) overall, the survey found. The manufacturing industry is the most affected, where 36% report a significant negative impact. At all companies, an additional 11% of CFOs expect a significant negative earnings impact if the price per barrel of oil reaches $50. In contrast, two-thirds of respondents say earnings are not tied to the price of oil in any significant way.Of the companies impacted by oil prices, 65% have absorbed most or all of the additional cost, rather than passing it along to customers, the survey found.Two-thirds of companies report increased expenses related to terrorism concerns; however, the increase averages only 3.5% for all companies.Health care costs, which CFOs report rose 10% over the past 12 months, are expected to rise another 9% in the coming year. For the past several years, CFOs have been forecasting double-digit healthcare increases.Despite this challenging business environment, CFOs' economic optimism averaged 71.98 (out of 100), just off last quarter's record high of 73.55. Optimism about company prospects was also virtually unchanged at a near record high of 76.06."Overall, CFOs see the economy as staying the course," said Burton Rothberg, assistant professor of accounting at Baruch College. "While they acknowledge the burden of numerous external factors, their forecasts suggest spending, earnings and revenues will increase. They're also expecting modest increases in employee count and salaries, with a spike in prices planned over the next year that exceeds today's inflation rate."Regarding interest rate levels, Rothberg noted that last quarter the surveyed CFOs as a group had been accurate in predicting that the market was overestimating the increase in rates. This quarter, CFOs still lean to the bearish side of interest rates, but not as strongly. About half feel the futures markets are "just about right" in forecasting that short-term interest rates will rise to 3.05% over the next 12 months, and 42% think the market is overestimating the increase. To gauge the accuracy of conventional wisdom, FEI and Baruch queried private companies this quarter on their attitudes towards Sarbanes-Oxley. Results indicate it is being embraced by private companies. Almost 60% of surveyed private companies plan to comply with at least some aspects of Sarbanes-Oxley. The reasons cited by those who are complying at least in part are that "It's a better way to run a business," 61%; "They anticipate it will apply eventually to private companies," 52%; and "Stakeholders should be treated like public investors," 35%.Of the private companies that might consider going public, over half (54%) say Sarbanes-Oxley will not deter them. In contrast, 20% are holdouts, saying they will not go public because of the requirements.Now that mutual funds must publicly disclose their proxy votes, just over half of the public company CFOs surveyed say these institutional investors are more interested in their companies' business and corporate governance practices than they were a year ago. Further, 42% say that they have more analysts covering their companies than they did the prior year.Despite expectations to the contrary, Sarbanes-Oxley is not creating widespread problems with earnings announcements' 69% of public company CFOs in the survey say the timing of their company's year-end earnings release will not be affected by Sarbanes-Oxley, and 59% say their book closing process is not taking longer.The CFO Outlook Survey interviewed CFOs from both public and private companies and from a broad range of industries, revenues and geographic areas. Financial Executives International, Florham Park, N.J., is an advocate for the views of corporate financial management. Its 15,000 members hold policy-making positions as chief financial officers, treasurers, and controllers. Baruch College, founded in 1847, is a senior college of the City University of New York. The Zicklin School of Business at Baruch College is the largest collegiate school of business in the nation.Visit Financial Executives International: www.fei.org"