Wall Street Flees Accounting-Challenged Companies

Companies involved in reporting or management controversies get pounded by investors. Who's next? Elsewhere: Tyco's CFO made a bundle in 2001, and PwC biggie resigns.


It was Wall Street’s version of an Elvis sighting.

Fearing that other Enrons are lurking on other balance sheets, skittish investors rocked the stock markets on Tuesday, sending most major averages sinking nearly 3 percent. Companies that have been involved in any kind of accounting scandal or financial irregularity — recently or since the Harding Administration — were hit hardest.

For example, investors lowered the boom on Tyco International yesterday. The reasons? Because the company shelled out $20 million to a board member for arranging a takeover, and because Tyco spent much more money on consulting services than auditing services with the same accounting firm.

Investors also hammered PNC Financial Services Group Inc. Why? Most likely, because bank authorities recently forced the company to restate earnings.

Apparently, investors also have very long memories. Cendant, whose own accounting scandal nearly put the company out of business a decade ago, saw its shares slump nearly 9 percent for merely being Cendant.

Investors also dumped shares of conglomerate General Electric, as well as tech behemoth IBM, simply because the two companies have complex corporate structures. “There are some people who are critical of IBM’s accounting practices too,” Bill Barker, a financial analyst for RBC Dain Rauscher, told the Associated Press. Added Barry Hyman, chief market strategist at Ehrenkrantz King Nussbaum, “The market is getting irrational in believing the whole accounting issue is in question.”

The crisis of confidence is not just a Wall Street story. It can also be seen as a message from smaller investors to Corporate America — clean up your books and accounting act, or at least make them easier to understand.

Even President Bush weighed in on the issue at his State of the Union address, when he demanded an improvement in corporate accounting policies.

As for Tyco, management said in a proxy filed earlier this week that it paid $20 million to Frank E. Walsh Jr., an outside director, and a charity he controls, as compensation for helping him put together its acquisition of CIT Group last year.

In the same filing, Tyco revealed that it paid its auditor, PricewaterhouseCoopers, $37.9 million for consulting, advisory, tax, and accounting services and only $13.2 million in auditing fees.

“This new Tyco story, the $20 million payment to get a deal done, it questions accountability, and are there any other stones to be turned over?” Hyman told the AP.

Meanwhile, PNC Financial said it will restate its net income for 2001, reducing it by about approximately $155 million as a result of PNC consolidating three subsidiaries of a third party financial institution in which PNC has preferred interests. The announcement caused PNC’s share price to plunge more than 9 percent.

PNC management said the Federal Reserve Board recently advised that, under generally accepted accounting principles, the company’s subsidiaries should be consolidated in preparing bank holding company reports. “That differed from accounting guidance PNC had received from its independent auditors,” management said in a statement. “Today’s action has been taken to conform financial reporting with regulatory reporting requirements, has been reviewed with PNC’s board of directors and has been concurred in by PNC’s independent auditors.”

PNC said that there is no off-balance-sheet debt related to the subsidiaries. The subsidiaries have no borrowings, are fully funded by equity capital, and have significant liquid assets. PNC also said it has no other investments with the same structure. “The effect of the consolidation is to reclassify PNC’s preferred interests, currently carried on its balance sheet as securities available for sale, to other asset categories including loans held for sale,” company management added in its statement.

Tyco CFO Earned Nearly $35 Million

Breaking up may be hard to do. But it sure pays well.

Just ask Tyco International chief financial officer Mark Swartz, who is helping oversee Tyco’s recently announced plan to break its company into four separate businesses. According to a company proxy filed with the SEC earlier this week, Swartz took home nearly $35 million in fiscal 2001 from salary, bonus, restricted stock awards, and gains from option sales.

While investors focused on the part of the Tyco proxy that showed the $20 million payment to a board member, they overlooked an even juicier section — the compensation tables. Swartz was paid a salary of $968,750 and earned a $2 million bonus. He also earned another $278,000 or so from interest credited on deferred compensation and more than $2.1 million in “other” compensation, which reflects contributions made on behalf of Swartz under Tyco’s qualified and nonqualified defined contribution plans.

But get this: Swartz also received nearly $15.2 million from restricted stock awards and then realized gains exceeding $13.7 million from exercising options last year. His total compensation: $34,259,100. Nice work if you can get it.

Swartz has been CFO since February 1995. Prior to that, he was the company’s director of mergers and acquisitions.

Swartz wasn’t the best paid Tyco exec last year, however. Chairman and CEO L. Dennis Kozlowski took home a total of about $42 million.

Who said conglomerates aren’t sound business models?

Today in Andersen

The House Energy and Commerce Committee has asked Andersen to provide information regarding the auditor’s actions when federal investigators probed Sunbeam and Waste Management Inc., two other Andersen clients that had accounting problems in recent years.

In addition, the committee asked Andersen whether it had provided auditing, consulting services, or advice to Enron, company officials, or related partnerships since 1997.

Meanwhile, Andersen has launched a campaign to retain all of its European clients, according to Reuters. An Andersen spokesman told the wire service that it sent a letter to all of its U.K. clients last Friday, outlining its position in relation to the events surrounding Enron’s collapse.

“Responsibility for its (Enron’s) strategy, financing and ultimate failure rests primarily with the company’s management and directors,” country managing partner John Ormerod said in the letter sent to clients, according to Reuters. The letter conceded that “an Andersen partner had committed a serious error of judgment,” but insisted Andersen’s “current practices and policies are robust and should not cause…any concerns.”

Earlier this week, Andersen chairman Joseph Berardino conceded that the accountancy is losing business because of the Enron controversy.

PwC Consultancy Head Resigns

The fallout from Andersen’s troubles with Enron have spread to another Big Five accounting firm. Scott Hartz, CEO of PricewaterhouseCoopers’ consultancy division, has resigned, according to the Financial Times.

Hartz is being replaced by PwC’s former chief operating officer Thomas O’Neill, according to Reuters, citing a spokeswoman for the consulting unit. “It was a mutual decision that we are going in different directions,” Hartz told the paper. “The new guy wants his own team,” he added, referring to Samuel DiPiazza Jr., who became PwC’s global CEO in December, succeeding James Schiro.

As you recall, back in 2000, PwC unsuccessfully tried to sell its consulting unit to Hewlett-Packard Co. for as much as $18 billion. Given what’s going on right now, HP management is looking good for having pulled the plug on that deal.

Short Take

Wells Fargo & Co. issued $1 billion in 5-year global notes, led by Credit Suisse First Boston and Bear, Stearns & Co. The notes were priced to yield 5.132 percent, just 79 basis points over comparable Treasurys, and were rated Aa2 by Moody’s and A-plus by S&P.

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