Scandal Updates on
Bob Jensen at Trinity University
Bob Jensen's main document on the Enron scandal and other accounting frauds is at http://www.trinity.edu/rjensen/fraud.htm
CBS MarketWatch Scandal Sheet --- http://cbs.marketwatch.com/news/features/scandal_sheet.asp?siteid=mktw
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The Conference Board Recommendations (Part 1 on Executive Compensation) --- http://www.conference-board.org/generalpdfs/756.pdf
September 20, 2002 message from FinanceProfessor [FinanceProfessor@lb.bcentral.com]
Merrill Lynch fired two executives (a Vice Chairman and a managing director) for their role in the Enron scandal. The two had taken their fifth amendment rights and not testified in front of congress, but Merrill (and others) saw this as an admission of guilt and let them go. http://money.cnn.com/2002/09/18/news/merrill_firing/index.htm
As officials turn their attention to Enron’s Broadband unit, the Houston Chronicle suggests that Ken Lay and Jeff Skilling may be next on Fed’s hit list. This is in part because the evidence will be easier to understand and is more like other insider trading cases.
It can no longer be said that all Enron employees kept their figures hidden. Ok, so I am not a comedian. Some former employees have decided to not hide anymore and posed for PlayGirl magazine. http://money.cnn.com/2002/09/18/news/enron_playgirl.reut/index.htmhttp://story.news.yahoo.com/news?tmpl=story2&u=/020918/161/29sw9.html&e=11
Worldcom’s problems just never seem to end. More accounting errors have been found that are expected to swell losses by another $2 billion. This will make nearly $9 billion in losses that had been accounted for incorrectly.
A sad part of all of the corporate fraud scandals is that there are many innocent victims. For example, we know all about the employees who have lost their jobs at Enron. Now WorldCom Inc. has announced they will be cutting 25 percent of its overseas staff in an attempt to return to profitability.
It seems Tyco had more problems than originally thought. Not only did Dennis Kozlowski get many unreported perks from the firm, now reports indicate that others at the firm also partook in the excess. Some had loans forgiven and some rather extravagant (and unreported at the time) perks including $15,000 for dog umbrellas and $2900 for hangers! (Can you imagine the size of the closet?!) One theory behind this lavish spending is that Kozlowski was trying to “buy off” those who knew what he was doing. All told over $170 million may have been taken from the firm.
(Since I know you want to find out what it looks like: here is a link to dog umbrellas. I could not find anything in the $15,000 price range, but if you can please let me know.) http://shop.store.yahoo.com/bsnstore/100904-1.html
And yet another problem at Tyco. Now it seems that all may not have been on the “up and up” with respect to Tycos’s takeover of CIT. If you remember that was the case where Frank E. Walsh a then Board member of Tyco who just happened to own a large stake in CIT. He received $10 million for bringing the companies together. Plus a donation in his name of another $10 million. The company is suing him for the return of the money. http://www.msnbc.com/news/809994.asp
As a result of the problems and the steep drop in stock price 9 of the 11 board members will not be renominated in what has been termed a “board shuffle”.
Currently Kozlowski and other top executives Tyco have had their assets seized and as a result had a difficult time coming up with bail money. In the end Kozlowski’s ex-wife came up with enough money to keep Mr. K and former CFO Mark H. Swartz out of jail. Prosecutors however are protesting that the house, which was pledged as collateral, was obtained with “tainted” funds. Stay tuned. http://www.nytimes.com/2002/09/13/business/13NORR.htmlhttp://www.nytimes.com/2002/09/16/business/16TYCO.html http://biz.yahoo.com/ft/020916/1031119357872_2.html http://news.bbc.co.uk/1/hi/business/2264822.stm http://biz.yahoo.com/tsp/020916/10042359_1.html http://story.news.yahoo.com/news?tmpl=story&u=/nm/20020917/ts_nm/manufacturing_tyco_investigation_dc_5 http://money.cnn.com/2002/09/18/news/kozlowski_jail.reut/index.htm http://www.msnbc.com/news/810084.asp http://www.cfo.com/article/1,5309,7676,00.html
Not unexpectedly, Adelphia has chosen to not pay the Rigases the severance pay that was originally agreed upon. The payments have been stopped as a result of the many cases of self-dealing and probable fraud that have surfaced since the original deal was struck back in may.
Federal officials are expected to expand the charges against the former Adelphia officials. Reportedly, one new charge will be obstruction of justice. http://story.news.yahoo.com/news?tmpl=story&u=/dowjones/20020918/bs_dowjones/200209180106000025http://www.msnbc.com/news/809475.asp
On the plus side, for the first time in a long time, Adelphia reported operating results. Ok, so they were only for June and July. They had to start somewhere. http://www.nytimes.com/2002/09/16/business/16ADEL.html
Slate has decided to look ahead and see what will happen to these fallen leaders. It predicts some (such as Ken Lay) can bounce back ala Michael Milken. Others, like Dennis Kozlowski probably can not.
Teaching ethics? Thinking about incorporating it more in your class? The economist provides some useful (and interesting!) resources. http://www.economist.com/globalExecutive/education/executive/
FBI agents and federal prosecutors are investigating the possibility that Enron and other companies conducted fraudulent electricity trades from 1999 to 2001 which resulted in the manipulation of power prices in California, Oregon, and Washington. http://www.accountingweb.com/item/90940
"NASD Plans to File Charges Against Salomon Grubman Citicorp Administrative Securities-Fraud Charges Stem From Analyst's Touting of Winstar," by Charles Gasparino, The Wall Street Journal, September 20, 2002.
The National Association of Securities Dealers is preparing to file administrative charges of securities fraud against Salomon Smith Barney and its former telecommunications analyst Jack Grubman, according to people familiar with the matter. The charges would stem from the firm's positive research reports on Winstar Communications Inc., a telecommunications company that filed for bankruptcy-law protection last year, these people said. The NASD's enforcement arm has notified lawyers for the big securities firm and Mr. Grubman that it could file an administrative case as early as Monday, though negotiations are continuing and the situation could change, these people say. Salomon may be able to persuade the NASD to settle on lesser charges amid the continuing negotiations.
The NASD has focused on whether Mr. Grubman misled investors by touting shares of Winstar, one of Salomon's investment-banking clients, amid evidence that the company was in deep financial trouble, people familiar with the matter say. Mr. Grubman had been a vociferous bull on the stock for several years, and he continued to support the company in his research even as evidence began to emerge in early 2001 about Winstar's financial problems. Any NASD civil action would mark the first major case by federal securities regulators investigating whether big securities firms obtained investment-banking business by making overly optimistic stock picks. Charles Prince, Salomon Smith Barney's new chief executive, met Thursday with Mary Schapiro, head of the NASD's regulatory division, to discuss the Winstar case, people familiar with the meeting say. Mr. Prince is intent on settling the matter as soon as possible, these people say.
Continued in the article.
Bob Jensen's threads on "Rotten to the Core" are at http://www.trinity.edu/rjensen/fraud.htm#Cleland
Bankrupt retailer Kmart explained the impact of accounting irregularities and said employees involved in questionable accounting practices are no longer with the company. http://www.accountingweb.com/item/90935
Kmart's CFO Steps up to Accounting Questions
AccountingWEB US - Sep-19-2002 - Bankrupt retailer Kmart explained the impact of accounting irregularities in a Form 10-Q filed with the U.S. Securities and Exchange Commission (SEC) this week. Chief Financial Officer Al Koch said several employees involved in questionable accounting practices are no longer with the company.
Speaking to the concerns about vendor allowances recently raised in anonymous letters from in-house accountants, Mr. Koch said, "It was not hugely widespread, but neither was it one or two people."
The Kmart whistleblowers who wrote the letters said they were being asked to record transactions in obvious violation of generally accepted accounting principles. They also said "resident auditors from PricewaterhouseCoopers are hesitant to pursue these issues or even question obvious changes in revenue and expense patterns."
In response to the letters, the company admitted it had erroneously accounted for certain vendor transactions as up-front consideration, instead of deferring appropriate amounts and recognizing them over the life of the contract. It also said it decided to change its accounting method. Starting with fourth quarter 2001, Kmart's policy is to recognize a cost recovery from vendors only when a formal agreement has been obtained and the underlying activity has been performed.
According to this week's Form 10-Q, early recognition of vendor allowances resulted in understatement of the company's fiscal year 2000 net loss by approximately $26 million and overstatement of its fiscal year 2001 net loss by approximately $78 million, both net of taxes. The 10-Q also said the company has been looking at historical patterns of markdowns and markdown reserves and their relation to earnings.
Kmart is under investigation by the SEC and the Justice Department. The Federal Bureau of Investigation, which is handling the investigation for the U.S. Attorney, said its investigation could result in criminal charges. In the months before Kmart's bankruptcy filing, top executives took home approximately $29 million in retention loans and severance packages. A spokesperson for PwC said the firm is cooperating with the investigations.
From SmartPros on September 13, 2002
Despite pressures on auditors to question financial statement numbers, companies can successfully negotiate during the audit process, according to a new CFO magazine survey.
Given the scrutiny audit firms have faced in the wake of recent accounting scandals, companies have braced for more rigorous audits. But according to a new survey conducted by CFO magazine, companies still generally prevail in the audit process.
Thirty-eight percent of CFOs reported being challenged during an audit in the past year. But of those whose financials were questioned, only 43 percent changed their practices to secure their auditor's approval. "Some 57 percent of companies that have been challenged did not alter their statements," says Julia Homer, editor-in-chief of CFO magazine. "Twenty-five percent got the auditor to agree to the practice in question, while 32 percent convinced the auditor that the results were immaterial."
A full 69 percent of the questioned results involved reserve amounts, and 36 percent involved revenue recognition.
Meanwhile, despite all the calls for overhauling the accounting industry, most CFOs voiced opposition to specific reforms. Some 52 percent, in fact, did not believe audit firms should be banned from providing consulting services to clients; 65 percent did not think auditors should be barred from going to work for clients for a specified period; and 52 percent did not think it wise to rotate auditors on a regular basis. "For CFOs, says Homer, "all of these proposals are just going to make their jobs more time-consuming and expensive."
The survey was based on the responses of 170 CFOs, 51 percent of whom worked at public companies. Featured in the September issue of CFO, it is the second of a four-part series documenting finance executives' response to the recent financial scandals. The first survey on financial disclosure was published in August. Follow-up surveys will examine the changing relationship between finance executives and the investment banking community, and changing pressures on the audit committee.
CFO is published monthly by CFO Publishing Corp., a division of The Economist Group.
"In Corporate America It's Cleanup Time Under pressure, a slew of companies are now changing the way they do business. Will it last?," by Jerry Useem, Fortune, September 16, 2002 --- http://www.fortune.com/indexw.jhtml?channel=artcol.jhtml&doc_id=209348
Even at a time when hunting for the "next Enron" has become a national sport, Krispy Kreme Doughnuts would seem a highly unlikely target. The North Carolina-based purveyor of crullers and Hot Original Glazed has long enjoyed a sweet reputation with customers and investors. But early this year some shareholder questions turned sour. In particular, why was Krispy Kreme using a "synthetic lease" to finance a mixing factory--an off-balance-sheet practice that carried a whiff of Enron-style finance? CEO Scott Livengood felt the criticism was undeserved, and that his company was already a model of transparency. "It was guilt by association," he says. "But in this new environment, it was shoot first and ask questions later."
So Livengood formed a governance committee of independent board members, which recommended a hasty overhaul of governance and accounting practices. Krispy Kreme's synthetic lease is toast. All inside board members, save Livengood, will eventually be replaced with outsiders. Corporate loans to executives have been banned. And the top five executives can now sell their stock only in preplanned, immediately disclosed blocks.
To avoid even a passing resemblance to Enron's notorious partnerships, furthermore, the company has terminated a mutual fund that let executives invest directly in Krispy Kreme franchises--and it returned only the initial, unappreciated sums the executives had invested. "I really regret the things that have put us in this position," says Livengood. "But there's been a tremendous amount of damage done to the credibility of honest people."
It's cleanup time in corporate America, and a new set of rules is in force. Some of those rules are, of course, literal, such as those proposed by the New York Stock Exchange or contained in Congress's Sarbanes-Oxley Act. But some are taking hold as a result of fear--fear of disgusted, distrustful investors and their various avengers, including SEC investigators and New York State attorney general Eliot Spitzer (see Eliot Spitzer: The Enforcer). "You've got a totally disaffected individual investor community, and they're angry," says former Securities and Exchange Commission chairman Arthur Levitt. "They're going to differentiate between companies that stand with them and companies that don't."
This is a huge change of heart that has come remarkably fast. Between 1992 and 1999, the number of companies beating First Call estimates by exactly one penny quadrupled--and investors rewarded those companies for what was seen as great reliability. Now, says Baruch Lev, an accounting professor at New York University, "there will be suspicion of exactly meeting estimates, or beating them by a penny"--the presumption being that those companies could be accused of cooking their books. Corporate executives feel the heat. In a poll taken by Kennedy Information, publisher of Shareholder Value magazine, 46% said the wave of scandals had harmed the way investors viewed their companies, while 43% were changing the way they did business.
The most visible change has been a stampede to expense stock options; as of press time, 81 companies had announced they would treat stock options as a cost of doing business. But the cleanup has extended to insider selling, financial disclosure, even CEO pay--all issues that fed the image of corporate corruption. "Hopefully, this will convince my mother that companies are serious and that the numbers can be trusted," says Peggy Foran, vice president for corporate governance at Pfizer.
At Citigroup, under fire for its financing of Enron and WorldCom, CEO Sandy Weill is adopting what Prudential analyst Mike Mayo sarcastically calls "just-in-time corporate governance." Besides doing an about-face on the issue of expensing all stock options, Weill has set up a special governance committee, pledged to avoid any deals involving hidden off-balance-sheet transactions, and reaffirmed a "blood oath" never to sell more than 25% of his Citigroup stock.
Coca-Cola CFO Gary Fayard has had a road-to-Damascus conversion on stock options. "When Enron hit, I said, 'It's an anomaly,' " he recalls. "When the scandals came flooding out, I was floored. I couldn't believe it was that endemic." Foreseeing increased scrutiny of corporate accounting--and prodded by board member Warren Buffett--he and CEO Doug Daft decided to bite the bullet and expense options. Even Cendant, a company whose excessive pay packages have long been ridiculed, is trying to ride the reform train: It slashed CEO Henry Silverman's pay in half--to a mere $15 million--by getting rid of his annual options package.
Among corporate governance activists, long used to measuring their gains in inches, there's a giddy sense of suddenly having run the field. "I've never seen a debate end this quickly," bubbles Charles Elson, a governance expert at the University of Delaware. "The era of the dominant CEO died a very quick and painful death. It will be a long time before it comes back."
Indeed, both the Sarbanes law and the NYSE proposals would turn the corporation into a less imperial, more constitutional place. Boards will need a majority of independent directors; a more powerful audit committee led by a "financial expert"; and the chance to meet without management present. "The old ceiling is the new floor," says Patrick McGurn, vice president at Institutional Shareholder Services.
Continued at http://www.fortune.com/indexw.jhtml?channel=artcol.jhtml&doc_id=209348
Bob Jensen's threads on proposed reforms are at http://www.trinity.edu/rjensen/FraudProposedReforms.htm
"Conseco's Colorful Crash It may not have the buzz of Enron, but this fiasco still scores on the shame scale," by Andy Serwer, Fortune, September 16, 2002 --- http://www.fortune.com/indexw.jhtml?channel=artcol.jhtml&doc_id=209384
Picture the scene: Conseco CEO Steve Hilbert and his CFO, sitting down to lunch at the Four Seasons in New York with Salomon Smith Barney analysts Colin Devine and Bill Ryan. Devine and Ryan know this isn't going to be a picnic. They just blasted the major insurance and consumer-lending company in a high-profile research report. But they never expected what happened next. "How the fuck could you do this to me?" Hilbert bellowed, as startled diners turned to stare. "Don't you know I spent $20 fucking million in fees at your firm last year?!" Wow!
That tete-a-tete took place in the spring of 1999, Devine says, when CEOs could yell things like that and analysts in said situations would usually fold. Hilbert doesn't acknowledge swearing; he concedes only that he was angry. But Devine didn't fold (Ryan left Salomon), and of course he was right. Conseco was rotten to the core. Now it's on the edge of bankruptcy.
Conseco is overshadowed by mega-disasters like Enron and WorldCom, but it's still a doozy. (If Conseco sounds familiar to faithful Street Life readers, it's because I wrote about it in June of last year-- Two Titans Play Conseco in the Middle. More on that in a minute.) Consider that Conseco's recent earnings restatement of $368 million for the year 1999 was the ninth largest in U.S. history, according to a New York University study. That Conseco is now the subject of a formal SEC investigation. That the company is not making interest payments on its $6.5 billion in debt.
As if that weren't enough, there's an incredible cast of characters here, including Steve Hilbert, who built Conseco brick by brick. Legend has it that Hilbert met his sixth wife, Tomisue, when she popped topless out of a cake at his stepson's bachelor party. Hilbert has previously denied this but acknowledges that Tomisue did work as an exotic dancer.
The beginning of the end for Conseco came when Hilbert bought Green Tree Financial--a mobile-home lender--for $6.7 billion in 1998. By spring 2000 the company had begun to flag. Exit Hilbert and enter Gary Wendt, the big, swinging GE exec who pledged to put the company in order. The stock jumped on the news. And then began a remarkably public battle between veteran raiders Carl Icahn, who was shorting the stock, and Irwin Jacobs, who was long (the subject of my article last year). All the while Devine, who was savaged by Jacobs and Wendt for not buying the turnaround story, stuck by his guns. "There were three things happening," says Devine. "Subpar earnings for the insurance business. Deteriorating credit quality at the old Green Tree business. And too much debt." Devine says that the company wasn't merely a victim of a weak economy during Wendt's tenure. The ex-head of GE Capital actually made matters worse. "The worst loans ever made by Conseco were within the past two years," he says. (The company denies that.) Meanwhile, Devine estimates that Wendt will end up taking more than $75 million out of Conseco for his trouble. The company says it's some $10 million less.
Continued at http://www.fortune.com/indexw.jhtml?channel=artcol.jhtml&doc_id=209384
Bob Jensen's "Rotten to the Core" threads are at http://www.trinity.edu/rjensen/fraud.htm#Cleland
"Accountants propose tougher standards," by John Saunders, Globe and Mail, September 5, 2002 --- http://www.accountingweb.com/cgi-bin/item.cgi?id=90067
Canada's chartered accountants, who have so far avoided embarrassment on the scale of the Enron-Arthur Andersen scandal, are considering new professional standards designed to keep auditors from sliding too far into bed with companies whose books they check.
A 68-page draft issued Thursday by the Canadian Institute of Chartered Accountants proposes rules mimicking some of those announced recently in the United States, including a five-year rotation of audit partners on public company audits.
It would also require auditors to apply broad principles in guarding their independence where specific rules do not exist. They would be instructed to watch for five types of threat:
•Self-interest threats, such as when an auditor owns shares in the client company or hopes to land a job with it, or when the auditor's firm depends too heavily on fees from the company and fears losing the work.
•Self-review threats, such as when an auditor previously worked for the company and would be checking his or her own work, or when the auditor's firm provided separate services relating to preparation of the financial statements.
•Advocacy threats, such as when an auditor sheds objectivity by acting on the client's behalf in a legal dispute or a stock promotion.
•Familiarity threats, such as when an auditor has a close relative in the client company's management or accepts significant hospitality from the company or simply has been involved with the company too long.
•Intimidation threats, such as when a client company hints it will change auditing firms over a disagreement on accounting or puts pressure on the auditor to cut fees and do less work than is needed.
Donald Wray, chairman of the CICA's public interest and integrity committee, said auditors facing such threats would not necessarily quit if adequate safeguards were created, in some cases merely by making full disclosure to the audit committee of the client company's board of directors.
"It takes a long time for rules to catch up to what's going on out there, and rules also encourage loophole hunting and finding ways to get around them," Mr. Wray, a retired PricewaterhouseCoopers LLP partner, said in an interview. "With the principles, you know where you have to get to with regard to independence in any situation you're in."
Continued at http://www.accountingweb.com/cgi-bin/item.cgi?id=90067
On April 11, 2002, the Securities and Exchange Commission filed a civil fraud injunctive action in the United States District Court for the Southern District of New York, alleging that from at least 1997 through 2000, Xerox Corporation, a Stamford, Connecticut-based public company, employed a variety of undisclosed accounting actions to meet or exceed Wall Street expectations and disguise its true operating performance from investors. These actions, most of which violated generally accepted accounting principles (GAAP), accelerated Xerox's recognition of equipment revenue by over $3 billion and increased its pre-tax earnings by approximately $1.5 billion over the four-year period from 1997 through 2000.
The complaint alleges that these accounting actions, which often were approved, implemented and tracked by senior Xerox management, had a substantial impact on Xerox's reported performance. For example, in the fourth quarters of both 1998 and 1999, accounting actions generated 37% of Xerox's reported pre-tax profit. The Commission's complaint further alleges that by 1998, nearly $3 of every $10 of Xerox's annual reported pre-tax earnings resulted from undisclosed accounting actions. Without these accounting actions, the complaint alleges, Xerox would have fallen short of market earnings expectations in virtually every reporting period from 1997 through 1999.
The allegations in the complaint center around seven different accounting actions that Xerox used to help meet or exceed market expectations from 1997 to 2000. Many of these actions accelerated Xerox's recognition of revenue into current periods at the expense of future periods. According to the complaint, Xerox fraudulently disguised these actions so that investors remained unaware that the company was meeting earnings expectations only by using accounting maneuvers that could compromise future results.
The complaint alleges that several of the accounting actions related to Xerox's leasing arrangements. Under these arrangements, the revenue stream from Xerox's customer leases typically had three components: the value of the "box," a term Xerox used to refer to the equipment; revenue that Xerox received for servicing the equipment over the life of the lease; and financing revenue that Xerox received on loans to its lessees. Under GAAP, Xerox was required to book revenue from the "box" at the beginning of the lease, but was required to book revenue from servicing and financing over the course of the entire lease. According to the complaint, Xerox relied on accounting actions to justify shifting more lease revenue to the "box," so that a greater portion of that revenue could be recognized immediately.
The complaint alleges that the two accounting actions with the largest impact on Xerox's financial statements were methodologies that Xerox called "return on equity" and "margin normalization." Xerox used the return on equity method to shift revenue to equipment that the company historically had allocated to financing. Margin normalization shifted revenue to equipment that historically had been allocated to servicing. These two methodologies, which did not comply with GAAP, increased Xerox's equipment revenues by $2.8 billion and its pre-tax earnings by $660 million from 1997 to 2000. The complaint alleges that Xerox fraudulently failed to disclose to investors its use of and changes to these methodologies — which were changes in accounting methods and changes in accounting estimates.
The complaint also alleges that Xerox used approximately $1 billion of additional accounting actions to artificially improve its operating results. By using these accounting actions and failing to disclose their use, Xerox violated GAAP as well as disclosure requirements. These additional actions included the improper use of "cushion" or "cookie jar" reserves, the improper recognition of the gain from a one-time event, and miscellaneous lease accounting related actions.
In addition, the complaint alleges that Xerox misled investors by failing to disclose the impact that approximately $400 million in sales of leases had on its 1999 operating results. The effect of these undisclosed sales was to immediately recognize income that otherwise would have been recognized in future periods. Although the company earlier had entered into similar transactions in small amounts, none compared in size or scope to the 1999 sales, which added $182 million in pre-tax profits to Xerox's 1999 results.
As alleged in the complaint, Xerox's fraudulent failure to disclose these accounting actions, most of which violated GAAP, resulted in Xerox filing periodic reports with the Commission that contained materially false and misleading statements and omissions, including 12 quarterly and four annual reports covering the period 1997-2000, and seven registration statements that were filed or in effect during this period which included four offerings that registered nearly $9 billion dollars worth of debt securities.
Without admitting or denying the allegations of the complaint, Xerox consented to the entry of a Final Judgment that permanently enjoins the company from violating the antifraud, reporting and recordkeeping provisions of the federal securities laws, specifically Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 13a-1, 13a-13, 12b-20 and 13b2-1 promulgated thereunder. In addition, Xerox agreed to pay a $10 million civil penalty and to restate its financial results for the years 1997 through 2000. Xerox also agreed to have its board of directors appoint a committee composed entirely of outside directors to review the company's material internal accounting controls and policies. Finally, as part of the settlement of this action, the Commission entered an Order exempting Xerox from certain filing requirements of the Exchange Act to extend, until June 30, 2002, the date by which Xerox and its finance subsidiary, Xerox Credit Corporation, may file annual reports on Forms 10-K for the fiscal year ended December 31, 2001, and quarterly reports on Forms 10-Q for the quarter ended March 31, 2002. (See Securities Exchange Act Release No. 45730 (April 11, 2002).)
The SEC is continuing its investigation of this matter as it relates to other parties.
"Sweeping Charges Expected for Tyco's Ex-Chief and 2 Others," by Andrew Ross Sorkin, The New York Times, September 12, 2002
The Manhattan district attorney and the Securities and Exchange Commission plan to bring new and wide-ranging criminal and civil charges today against Tyco International's former chief executive and two other former executives, people briefed on the plan said last night.
Tyco is also planning to file its own lawsuit as early as today against the former chief executive, L. Dennis Kozlowski. Tyco will seek the return of his income and benefits since 1997, an amount that is at least $250 million, and the forfeiture of all his severance pay, these people said.
The Manhattan district attorney, Robert M. Morgenthau, plans to indict Mr. Kozlowski as well as Tyco's former chief financial officer, Mark H. Swartz, and the company's former general counsel, Mark A. Belnick, on charges that include conspiracy to commit fraud, larceny and enterprise corruption, these people said. The S.E.C. is expected to accuse the men of securities fraud and plans to seek millions of dollars in penalties, these people said.
Business Week Cover Story: THE GOOD CEO
Their names aren't household words, and their companies aren't glamorous. These are corporate chiefs who, by and large, came up through the ranks and were more interested in building a lasting enterprise than a personal fortune. They aren't white knights on white horses, making big changes and big headlines, but here are six company men in the best sense of the phrase. For BW subscribers : http://www.businessweek.com/premium/content/02_38/b3800001.htm?c=bwinsidersep13&n=link1&t=email
For all as of September 16, 2002 : http://www.businessweek.com/magazine/content/02_38/b3800001.htm?c=bwinsidersep13&n=link1&t=email
"Vivendi Messages About Audits Are Seized, by John Tagliabur, The New York Times, September 10, 2002 --- http://www.nytimes.com/2002/09/11/business/worldbusiness/11VIVE.html?t
PARIS, Sept. 10 — French securities regulators have seized documents showing that the former management of Vivendi Universal sought to press its French auditor into accounting for the sale of shares that Vivendi held in the British pay television service B Sky B in a way that would have inflated Vivendi's annual profit.
The documents, which include letters and e-mail messages sent and received by senior Vivendi executives, including the former chairman, Jean-Marie Messier, who was ousted in July, were published today in Le Monde. They show, among other things, that Mr. Messier brought intense pressure to bear on Salustro-Reydel, Vivendi's French auditing firm, to adopt a proposal for accounting for the sale of shares in British Sky Broadcasting that had been originally put forward by its American auditor, Arthur Andersen, but was ultimately rejected by French regulators.
Under Vivendi's original proposal, the company would have inflated its 2001 profit by about $1.4 billion by accounting for gains from the sale before the shares were actually sold. The French securities regulator ruled that the accounting was unacceptable under French auditing rules, and Vivendi ultimately treated the shares as a liability instead
Continued at http://www.nytimes.com/2002/09/11/business/worldbusiness/11VIVE.html?t
Bob Jensen's threads on fraud are at http://www.trinity.edu/rjensen/fraud.htm
The U.S. Securities and Exchange Commission filed a complaint against the former CEO of HPL Technologies, charging him with fabricating over 80% of the company's reported revenues for fiscal 2002. http://www.accountingweb.com/item/90356
A survey of U.S. employers conducted by Mercer Human Resource Consulting shows most companies expect a change in stock option accounting over the next five years. Some expect to make changes that will affect their employees' compensation. http://www.accountingweb.com/item/89923
From E&Y's Thought Center on September 11, 2002
SEC ADOPTS A DISCLOSURE RULE...watch a related webcast!
"Full Speed Ahead: Accelerating the Reporting and Disclosure System" View this program at http://www.ey.com/webcast?mfac&pid=19
August 27, 2002 - The Securities and Exchange Commission adopted rules to accelerate the financial reporting deadlines for quarterly and annual reports for larger public companies over a 3-year implementation period. In addition, the SEC adopted final rules, as required by Section 302 of the Sarbanes-Oxley Act (the "Act"), to require management certifications in quarterly and annual reports.
You can also read more about this transition in an SEC press release available for download in the related links section of the archived event.
Ernst & Young Online clients can access the SEC press release through Ernst &Young Online and the A&A Toolkit, as well as other valuable A&A news. A&A information is updated on a regular basis. If you would like to sign for EYOnline, please contact your Ernst & Young engagement team.
View other archived webcasts!
Click on one of the archived events below to view:
Finding a Home for Special Purpose Entities: Understanding the FASB's Proposed New Rules on Consolidation
Protect Against EPS Volatility: Here's What's New With FAS 133
Purchase Accounting Rules: Win By a Knockout (FAS 141/142)
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"How to Tie Pay to Goals Instead of the Stock Price," by Daniel Altman, The New York Times, September 8, 2002
In a short memoir of his time at Yale University, James Tobin, the late Nobel-winning economist, separated professors there into two camps: the institutional types and the free agents. The institutional types were committed to building Yale's economics department and stayed loyal to the university. The free agents looked for better job offers and moved often. The free agents might have been brilliant scholars, but the institutional types, Professor Tobin observed, were more valuable to Yale. There may well be a parallel in corporate America. In recent years, fatter and fatter pay packages, laden with stock options and other rewards like low-interest loans, have helped turn many executives into free agents. Yet because it was the way to sure gains, the free agents often played to Wall Street and turned their stock and options into quick, easy money rather than ensuring their companies' long-term prospects. Finding and retaining executives who are committed to helping a company grow over the long run might stop the cycle of skyrocketing pay and dwindling tenure. It might also help to curb the anything-goes ethics that led to the type of excesses seen at companies like Enron and WorldCom. The question is this: How can companies reward executives in a way that provides proper incentives for good performance and encourages high-performance institutional types? While corporate boards struggle to answer that question, professional experts on executive pay, as well as academics who study incentives, offer some guidance. Many recommend granting stock, especially with restrictions on its future sale, instead of granting options. Some suggest promoting loyalty and performance by tailoring executives' packages to their personal tastes within reason. Virtually all the experts recommend an emphasis on long-term rewards for long-term success. Pay packages "will be more goal-oriented than purely market-oriented," said Steven E. Gross, who leads the United States employment compensation practice at Mercer Human Resource Consulting. Rather than depending on stock prices alone, rewards could include grants of cash or stock for concrete achievements over a period of years, he said. The trend that culminated last year, when executives of failing companies cashed in huge stock grants and options, actually began two decades ago, during the leveraged-buyout wave of the 1980's. Firms like Kohlberg Kravis Roberts, as buyers of undervalued businesses, looked for ways to link the outsiders they installed as executives to their new companies' futures, according to a recent paper by Brian J. Hall, a professor at Harvard Business School. Institutional investors also pushed executives to take ownership stakes, thinking that the executives would work to increase the return on their investments, Professor Hall wrote. As an added incentive, the tax and accounting treatment of stock options made them cheaper to dole out than cash or stock. But such pay plans, Mr. Gross said, have little downside for executives. "I'm encouraging you to take risks to raise the stock price," he said, taking the role of a corporate board. "What happens if you fail? Nothing."
In the 1990's, the trend gathered speed. Pay packages became sweeter as the market for executive talent became tighter. The success of outsider chief executives led companies to realize that they might achieve impressive results by bypassing their internal talent pools, said Robert H. Frank, a professor of economics and management at Cornell University. By 1993, top executives were moving among the country's biggest companies with increasing regularity. In that year, Eastman Kodak, I.B.M., Metro-Goldwyn-Mayer, Sunbeam-Oster and Westinghouse Electric all found new chiefs from outside their own executive suites. Professor Frank compared the budding market for executives to the advent of free agency in baseball in the 1970's. Once teams could compete to lure talent, some players' salaries broke through the traditionally flat pay scale. "It just became a free-agent market once there was this seismic shift to the view that people outside your company might be able to help your company," Professor Frank said.
Continued in the article.
"Reining In the Imperial CEO.- compensation," by David Leonhardt, The New York Times, September 15, 2002
Are the days of the imperial chief executive coming to an end?
Last week, the board of Adelphia Communications disclosed that it would not pay John J. Rigas, the company's founder and former chief executive, a $4.2 million severance package his contract calls for, citing the fraud charges that have been brought against him. On Tuesday, directors at WorldCom discussed whether they could take a similar step against Bernard J. Ebbers, their former leader and a company founder, who is under investigation.
On Thursday, Tyco International filed a civil suit against L. Dennis Kozlowski, who stepped down as chief executive in June, to recover his income from the last five years and his severance pay. The same day, the Manhattan District Attorney's office indicted Mr. Kozlowski on fraud and other charges.
At healthier companies, meanwhile, directors are scouring more closely than ever the pay contracts they have extended to top executives. Some are promising to redouble their efforts to connect pay to performance.
The lifetime perquisites granted to General Electric's former chairman, John F. Welch Jr. described in a recent divorce filing by his wife, Jane have increased the scrutiny given to the pay packages of retired executives as well.
For the first time in years, some boards appear to be responding to criticism of executive pay with actions, checking the perks, if not the power, of the nation's once-lionized chief executives. Over the last decade, those executives have come to expect not only millions of dollars of pay each year but also lavish pension plans, low-interest company loans (often forgiven) and deeply discounted use of a corporate jet for personal travel.
"Boards are increasingly considering the public perception that overly aggressive pay packages create," said Barbara M. Barrett, a director of three public companies, including Raytheon. There will be, she added, "a thoughtful curbing of rambunctious pay packages."
Ira T. Kay, the top pay expert at Watson Wyatt Worldwide, a consulting firm, added, "Boards definitely have more backbone than they did before."
How far directors go will not be known until early next year, when most companies publish their annual proxy statements. A significant decline in executive pay is very unlikely.
At the least, however, corporate directors have turned an eye on the more egregious perks that became so common during the boom years and appear to be stiffening their resolve when negotiating with executives who are on their way out.
"Boards are getting a little tighter-fisted," said Robert J. Stucker, a lawyer at Vedder, Price, Kaufman & Kammholz in Chicago, who represents executives during contract talks. "They're just being more careful about what they're agreeing to."
Continued in article.
An apology by Jack Welch appears
Dilemma And How I Resolved
The Wall Street Journal
on September 19, 2002
Sex, Lies, and a Welched Deal
The Latest on the Soap Opera Saga brought to you by General Electric:
In the latest ripple effect of the recent wave of accounting scandals, former GE CEO Jack Welch gave back some perks made public in his recent divorce dispute. A day later, GE got word of an SEC inquiry into the matter --- http://www.trinity.edu/rjensen/fraud093002.htm
In the latest ripple effect of the recent wave of accounting scandals, former GE CEO Jack Welch gave back some perks made public in his recent divorce dispute. A day later, GE got word of an SEC inquiry into the matter. http://www.accountingweb.com/item/90699
And his girl friend was fired as Editor of the Harvard Business Review.
I smell Hollywood here! Bring on Michael Douglas
For more reports on this soap opera, see the following:
http://www.nytimes.com/2002/09/16/business/16CND-WELCH.html http://story.news.yahoo.com/news?tmpl=story&u=/nm/20020916/people_nm/people_welch_dc_12 http://story.news.yahoo.com/news?tmpl=story&u=/ap/20020916/ap_wo_en_po/us_welch_perks_3 http://www.businessweek.com/bwdaily/dnflash/sep2002/nf20020918_7629.htm http://www.fortune.com/indexw.jhtml?channel=artcol.jhtml&doc_id=209546
"From Investor Fury a Legal Bandwagon," by Johathan D. Glater, The New York Times, September 15, 2002
CORPORATE malfeasance and executive greed have undermined the stock market and fleeced investors, but they have also proved to be a boon for one sliver of the economy: securities lawyers.
Whether drawn by an improved image as champions of the little guy or by the prospect of tens of millions of dollars in fees, law firms and individual lawyers are jumping into the business of suing companies, their directors or officers on behalf of investors who feel lied to and cheated.
"You are seeing many, many, many more law firms coming into the field," said Mark C. Gardy, a partner at Abbey Gardy, a New York law firm that specializes in representing investors in securities lawsuits. "There's no barrier to entry. You're seeing people who in the past were referring lawyers, or who just happened to have a friend who lost some money."
The influx of new lawyers is evident from the increasing number of lawsuits filed against companies: Enron, or its executives, alone has been hit by 45 securities lawsuits, Adelphia by 56 and Tyco by 60.
Lawyers for companies and investors alike said the increased interest in shareholder lawsuits might have been inevitable. There have been too many enormous, well-publicized corporate scandals of late, it is easy to attract clients over the Internet, and the potential legal fees are staggering.
"We're in a relatively unique time," said Lawrence A. Sucharow, president of the National Association of Securities and Commercial Law Attorneys and a partner at Goodkind Labaton Rudoff & Sucharow, because the confluence of widespread scandal, the speculative bubble and a large pool of burned investors has created a unique opportunity. "The losses of any one of these cases may have equaled the market drop of all the cases in any other year, because the stocks were pumped up so much by the bubble," he said.
Established plaintiffs' lawyers the most famous being William S. Lerach of Milberg Weiss Bershad Hynes & Lerach say the new competitors are not a serious threat to them. But they concede that the new lawyers are changing legal tactics and sometimes setting off fierce battles to control big lawsuits. For now, lawyers say, there are plenty of targets to go around.
After all, millions of angry investors have lost billions of dollars, and there are many to blame: corporations, fat-cat executives, boards, lawyers, accountants and financial advisers, as well as the investment bankers who played games with stock offerings and the analysts who talked up the stock price of corporate lemons.
All of these deep-pocketed potential defendants tarred by earnings restatements, accounting scandals and now, in some cases, by criminal indictments represent a potential gold mine for securities lawyers.
Restatements are confessions that the numbers were wrong, taking care of the first argument that a plaintiff would have to make, said Michael A. Perino, a law professor at the St. John's University School of Law in New York. "Now all you have to do is take the next step and say they were fraudulently wrong," he said. Indictments can make that argument easier, too.
White-shoe lawyers most of whom will not touch plaintiff-side work and corporate executives have always disdained people who file shareholder lawsuits, accusing them of pressing frivolous complaints every time a stock declines in value. Most of the suits involve accusations of accounting fraud, rather than of insider trading or another scheme, the kinds of allegations made more often in the past.
The increased number of lawsuits, and of lawyers bringing them, has executives fuming, but quietly. The executives don't want to draw attention to themselves or to their companies, said Michael L. Charlson, a securities litigator in New York at Heller Ehrman White & McAuliffe, which represents companies. "People who have spoken up about such things in the past have sometimes ended up regretting it," he said. "They end up getting sued."
Nonetheless, he added, it is clear that the lawsuits will discourage people from serving as company directors and will force executives to spend time and money defending themselves. "These lawsuits are a huge distraction when they hit," Mr. Charlson said. "They take a tremendous amount of time."
Defense lawyers also complain that plaintiffs' lawyers try to squeeze as much money out of companies as possible, without putting the defendant out of business. That will be trickier now, because so many targets Enron, WorldCom and Global Crossing among them have filed for bankruptcy protection.
Message from RiskNews on September 20, 2002
JP Morgan Chase admitted its credit rating agency downgrades will have a "small impact" on its derivatives flows, despite an overall attempt to downplay the rating agencies' actions. Standard & Poor's and Fitch Ratings lowered the long-term credit rating for JP Morgan Chase Bank - the derivatives counterparty - to AA- from AA. The agencies acted after the US bank warned it expects third-quarter earnings to be well below those of the second quarter, citing a weak trading performance and losses on loans to telecom and cable companies. JP Morgan's five-year credit default spreads widened 26 basis points to around 100bp over Libor. Meanwhile, Munich Re's spreads widened about 8bp to 65-mid, following its financial strength downgrade by Moody's from Aaa to Aa1
From The Wall Street Journal Accounting Educators' Review on September 13, 2002
HealthSouth Corp. Executives
Had Hint of Billing
REPORTER: Ann Carrns
DATE: Sep 05, 2002
TOPICS: Accounting Changes and Error Corrections, Advanced Financial Accounting, Disclosure Requirements, Earning Announcements, Financial Accounting
SUMMARY: HealthSouth Corp. is being required by Medicare to reduce billings for certain physical therapy services they provide. The change will have a substantial impact on the company's profitability.
1.) Describe HealthSouth Corp.'s operations as you understand them from the article.
2.) Describe the nature of the problem facing HealthSouth Corp.'s executives. What accounting adjustment will result from resolving this matter? Specifically state the journal entry that will have to be made. What accounting standard governs this adjustment? How will this item be displayed and what disclosures about it must be made in the financial statements?
3.) Why does the author title this issue a "billing problem" rather than a revenue recognition issue?
4.) The author questions whether HealthSouth executives should have alerted investors to this problem earlier than they did. Under what venue would they make this disclosure? What standards or regulations govern the requirement to disclose this information to investors?
5.) Management argues that they would not have had to disclose this item to shareholders if it were not material. What defines materiality? Could the issue be material even in the amount affecting current year results is small relative to the company's overall operations? Explain.
6.) Do you think the discussion of Mr. Scrushy's executive stock options is relevant to the issue at hand? Why do you think the author included this information?
By: Judy Beckman, University
of Rhode Island
Reviewed By: Benson Wier, Virginia Commonwealth University
Reviewed By: Kimberly Dunn, Florida Atlantic University
Bob Jensen's threads on the Columbia/KPMG and other related medical billing frauds can be found at http://www.trinity.edu/rjensen/fraud.htm#HealthcareFraud
From The Wall Street Journal Accounting Educators' Review on September 13, 2002
Ford Publicly Disputes
Report That Questions Its
REPORTER: Norihiko Shirouzu
DATE: Sep 11, 2002 PAGE: D2
TOPICS: Accounting, Accounting Fraud, Accounting Irregularities, Cash Flow, Financial Accounting, Financial Analysis, Financial Statement Analysis
SUMMARY: Gary, Lapidus, an analyst with Goldman Sachs Group Inc., issued a report alleging that Ford Motor Co. overstated its cash balance and cash flows. Ford is publicly disputing the allegations.
1.) Describe the issue related to Ford Motor Co. being questioned by Mr. Lapidus?
2.) Does Ford Motor Co. have an obligation to make immediate payments to Ford Credit? If the payments are not made, is the cash balance overstated? Are cash flows overstated? Do there appear to be any problems with the accounting? Support your answer.
3.) If Ford Motor is required to make the payments in the future, how should the obligations be reported in the financial statements? Do the future payments influence net income in the current and/or future periods?
4.) Discuss the logic underlying Mr. Lapidus's criticism of Ford Motor Co. Is delaying cash payments a good economic decision? Does the accounting appear to reflect the underlying economics of the transaction? Support your answer.
By: Judy Beckman, University
of Rhode Island
Reviewed By: Benson Wier, Virginia Commonwealth University
Reviewed By: Kimberly Dunn, Florida Atlantic University
September 19, 2002 message from glan@UWINDSOR.CA
Anyone watched the PBS show yesterday "End Game: Ethics and Values?" As noted by the moderator, the majority of the on-site and on-line participants was giving the "right moral" answer to ethical dilemmas facing Julia ,an outstanding teacher who is raising money for a foundation to promote education for the disadvantaged kids and Allison, her former student and now her friend, who is also a succesful business executive. Yet, there is a fair amount of cheating, bribery , unethical behaviour going on. In some cases, there are plenty of people who know about an unethical behaviour but look the other way.
[For those who missed it, here is a brief synopsis: Because of a momentary inattention, Julia ( the driver) and Allison caused another driver to swerve and go off a cliff and he died as a result. Julia was also drinking. Should they report the accident knowing that the foundation will go in smoke? Later they found out that the driver of the other car was also driving. What is to be gained by reporting the accident? Should Allison turn in her friend?...]
A few points that were mentioned:
1. Knowing what is right and actually doing the right thing are two different things, especially, when it is "up close and personal" and when you believe other people will be penalised.
2. Lack of imagination -- thinking that everything will be lost if you come clean . Or learning how to do it in the smart way, as mentioned by an ethics consultant to corporations.
3. Things are hardly black and white in the world.
"The Mash Note Every CEO Wants A coveted note from Warren Buffett," by Jerry Useem, Fortune, September 16, 2002 --- http://www.fortune.com/indexw.jhtml?channel=artcol.jhtml&doc_id=209349
What are the most coveted words in corporate America today? That's simple: "Sincerely, Warren."
With companies competing to clean up their act, a letter of praise from super-investor Warren Buffett has become the ultimate Good Housekeeping Seal of Approval. General Electric got one for announcing it would expense stock options. "For long, GE has brought good things to life," Buffett wrote. "Now GE has brought good things to accounting."
Standard & Poor's got one, too, for its new "core earnings" measure. "Your move is both courageous and correct," Buffett wrote in his letter, which S&P liked enough to post on its website. "In the future, investors will look back at your action as a milestone event." Other lucky recipients have included Bank One and Amazon.
"He's the only person or entity out there that still has an unblemished reputation," says S&P analyst Robert Friedman. Well, a few other voices still command credibility, such as John Bogle, the outspoken founder of Vanguard Group. But how did Bogle know that a speech about corporate accountability went over well? "[Buffett] gave me a very nice note after reading that speech," he says.
Continued at http://www.fortune.com/indexw.jhtml?channel=artcol.jhtml&doc_id=209349
The Warren Buffett Business Factors, free internet book. (Selected articles from the Letters of Warren E. Buffett to the Shareholders of Berkshire Hathaway Inc.) --- http://www.frips.com/wbbf.htm
Mynew and updated documents the recent accounting and investment scandals are at the following sites:
Bob Jensen's threads on the Enron/Andersen scandals are at http://www.trinity.edu/rjensen/fraud.htmBob Jensen's SPE threads are at http://www.trinity.edu/rjensen//theory/00overview/speOverview.htmBob Jensen's threads on accounting theory are at http://www.trinity.edu/rjensen/theory.htm
Bob Jensen's Summary of Suggested Reforms --- http://www.trinity.edu/rjensen/FraudProposedReforms.htm
Bob Jensen's Bottom Line Commentary --- http://www.trinity.edu/rjensen/FraudConclusion.htm
The Virginia Tech Overview: What Can We Learn From Enron? --- http://www.trinity.edu/rjensen/fraudVirginia.htm
Bob Jensen's homepage --- http://www.trinity.edu/rjensen/
March 2000, Forbes named AccountantsWorld.com as the Best Website on the
Web --- http://accountantsworld.com/.
Some top accountancy links --- http://accountantsworld.com/category.asp?id=Accounting
For accounting news, I prefer AccountingWeb at http://www.accountingweb.com/
Another leading accounting site is AccountingEducation.com at http://www.accountingeducation.com/
Paul Pacter maintains the best international accounting standards and news Website at http://www.iasplus.com/
How stuff works --- http://www.howstuffworks.com/
Jensen's video helpers for MS Excel, MS Access, and other helper videos are at http://www.cs.trinity.edu/~rjensen/video/
Accompanying documentation can be found at http://www.trinity.edu/rjensen/default1.htm and http://www.trinity.edu/rjensen/HelpersVideos.htm
Robert E. Jensen (Bob) http://www.trinity.edu/rjensen
Jesse H. Jones Distinguished Professor of Business Administration
Trinity University, San Antonio, TX 78212-7200
Voice: 210-999-7347 Fax: 210-999-8134 Email: firstname.lastname@example.org