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CLINTON, Miss. – Nearly a month after auditors discovered a $3.8 billion `misstatement’ on WorldCom’s books, pundits are speculating on how far and how wide this latest corporate debacle will extend to individual investors’ portfolios. The fallout is sure to rankle those who rely heavily on professional financial advice for their foresight and guidance in assessing long-term and short-term investment returns. Suffice to say, industry watchers point to a growing resentment against company executives that maneuver accounting books to make the bottom line appear glossier than it actually is. Meanwhile, the accounting and planning industries are bracing for investors looking to point the finger of blame. Setting aside the issue of accountability in the midst of market turbulence that has occurred over the past few months, all along, advisers have preached a two-fold lesson: diversification and recognizing the amount of risk one can tolerate. “What’s happened over the past months is investors are giving up on the stocks and this has driven the S&P 500 well below its 40% peaks,” said Larry Halverson, senior vice president, equities for CUNA Mutual Group’s MEMBERS Capital Advisers. “Even the most egregious activities were well into legal activities before being discovered.” Halverson underscores the perennial need for diversification coupled with the understanding between investor and adviser that there is no protection against fraud. “It’s part of the reason why diversification is so important and not to compare long-term growth to what’s going on with the economy today,” Halverson said. Mainly because of its founding philosophy, credit unions are generally in the business of creating a well-padded buffer zone from financial moves that can significantly affect a member’s livelihood. But most agree that this tenet does not shirk the investor’s responsibility of being prudent and aware. To that end, to effectively manage client expectations and provide much-need assurance during turbulent times, many financial planners rely on a proactive approach, said David Bennett, a certified financial planner with Total Financial Concepts in Los Angeles. “During times of significant market corrections, we radically ratchet up our client contacts,” Bennett said. “Our goal is to reach our clients before their level of concern compels them to call us.” Over the past few years, investors’ expectations have come to match the rising performance of the bullish stock market, Bennett explained. Now, as the market has declined and entered a period of volatility and his clients worry about their investments, he is focusing on modifying overly optimistic expectations and relieving investors of their short-term anxieties. To start, proactive communication techniques are crucial. Bennett contacts his clients regularly, often through written correspondence, to explain what is happening in the stock market and to keep them focused on their long-term goals Still, it’s inevitable some investors will be angry and quick to hold someone accountable for their losses as evident by a host of class action lawsuits underway against WorldCom, Enron and others. From senior executives and board members down the line to auditors to financial planners and accountants, investors are livid, but heated emotions may be minimized if advisers take a proactive approach that protects them as well as their clients. “CPAs need to protect themselves from risk,” said Ric Rosario, vice president of risk management at CAM/CO Mutual Insurance Co. He cites concerns over the blurring of lines of firms that offer accounting and auditing services but emphasized that due diligence is necessary to avoid conflicts of interest. “They can do this first and foremost by writing a clear engagement letter that defines their role with the investor.” Rosario said the engagement letter should include the exact type of service to be given: Will the CPA only provide advice? Will the CPA monitor the investments? What should the company and investors expect from the adviser? At the end of the day, accountability from all ends is key, Rosario emphasized. “It is critical that CPAs ultimately not allow clients to shun their responsibility of investment risk by delegating decisions on investment goals and the necessary specific investment decisions that will follow.” Halverson agrees, saying “the eruptions of corruptions are a part of the history of all economies” and that long term-returns included space for these types of fallouts. Much of the accountability is poised to stem from stiffer regulations from federal regulators with even stronger-armed proposals coming straight from the White House. Pres. George W. Bush recently proposed a trove of measures to root out corporate fraud. Along with calling for a strengthening of the SEC’s power to freeze payments to CEO’s whose corporations are under investigation, he said he would sign an executive order creating a corporate fraud task force assigned to coordinate investigation and prosecution of corporate fraud. “The task force will function as a financial crimes SWAT team, overseeing the investigation of corporate abusers and bringing them to account,” Bush said. And of those investors that had or have WorldCom, Enron or other beleaguered company stocks in their portfolios? Some say some individual investors are often stymied when it comes to determining which fund owns what stocks. Most funds make complete portfolio disclosures only twice a year, and the information is stale by the time investors see it, some consumer groups argue. Fund companies also aggregate their holdings in stocks and file paperwork with the SEC but these disclosures don’t say which specific funds within the family hold large portions of a certain stock and which funds are abstaining from it. “Good managers own up to mistakes, either in quarterly updates, in management discussions on their Web sites or elsewhere,” Bennett said. “Don’t be afraid to call your fund and ask about its exposure to these stocks. But if one of your funds gets burned by a scandalous stock, ask why the manager purchased that issue in the first place.” -

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