It’s the busy season for accountants.
Virtually every day, another company — or three — announces a restatement, a delayed filing or a regulatory investigation. On Monday alone, nearly a half-dozen companies found themselves embroiled in an accounting controversy.
Of course, all this came on the day when former Enron Corp. Chairman Kenneth Lay cancelled plans to testify before Congressional panels, then resigned from the bankrupt energy company’s board of directors, then slipped away. Lay’s attorney claims he does not know where Lay is — and therefore could not accept a subpoena from the House Financial Services Committee. We’re guessing the attorney probably knows where to send Lay his bill, however.
Members of the Congressional committee seemed stumped by Lay’s disappearance. “We made contact with Mr. Lay’s attorney this afternoon … He tells us he does not know of Lay’s whereabouts, which we find quite puzzling to say the least,” said Peggy Peterson, spokeswoman for the committee, according to a Reuters account.
Monday wasn’t all bad for Enron investigators, though. Former Enron Chief Executive Jeffrey Skilling said he still plans to testify before a congressional committee later this week. Whether Skilling actually talks, or merely invokes the Fifth Amendment, remains to be seen.
Today’s Restatements, Investigations, and Scandals
- The biggest company to announce an earnings restatement on Monday was another major Houston-based energy company — Pennzoil-Quaker State. The maker of motor oil and other products said it is restating its financial results for each quarter dating back to 1999. The reason? An error stemming from a joint venture, according to the company’s 8-K filing on Monday.
As a result of this restatement, Pennzoil cut net income for 1999 and 2000 by $600,000 and $1.6 million, respectively. The restatement does not affect reported cash flow or cash flows from operations, the company stated in the filing.
Apparently, the financial rejigging stems from an error in the consolidated financial statements of Excel Paralubes, a joint venture between Pennzoil and Conoco Inc. Excel operates a base oil processing facility located adjacent to Conoco’s refinery in Lake Charles, La.
Conoco operates the plant and Pennzoil relies on Conoco for financial and operating data, Pennzoil claims. “Under a co-products sale and purchase agreement, certain co-products produced at an adjacent Conoco facility are allocated between Excel Paralubes and Conoco based upon Excel’s feed stream flow rates and compositions,” the company stated in the 8K. “Excel recently determined that the measurements of the allocation of co-products between Excel and Conoco had been in error since the commencement of Excel’s operations in 1997. The restatement is necessary as a result of the error.”
- The share price of Tyco International Ltd., meanwhile, fell another 16 percent after the Wall Street Journal said the conglomerate did not disclose $8 billion worth of acquisitions over the past three years. Tyco management also reported that it plans to use bank credit lines to pay off $4.5 billion worth of commercial paper.
Things only got worse for the reeling company later in the day. Standard & Poor’s and Fitch Ratings cut their debt ratings on Tyco because the company may have difficulty raising cash due to the tapped credit lines. The lowered ratings will make it more expensive for the embattled Tyco to borrow money in the future. “We just don’t believe the company should be in the ‘A’ category when it has to draw down on its bank lines that are there simply to backstop CP (commercial paper) programs,” said Thomas Kelly, an S&P managing director of industrials, in a conference call.
And in a real sign of company unity, management at Tyco’s captive financing arm, Tyco Capital, said it would revert to its original name, CIT, to distance itself from the parent. CIT–nee Tyco Capital–also announced it would restrict the purchase of assets from Tyco and prohibit loans and dividend payments to the company.
- Management at high-speed communications network operator Global Crossing Ltd., which filed for bankruptcy last week, said it formed a special committee of independent directors to review allegations of improper accounting practices made by a former finance. Those allegations were leveled by a Global Crossing executive in a letter written back in August.
Global Crossing management also said it turned over to the SEC a copy of that letter, which was written by Roy Olofson. At the time of the writing, Olofson was a vice president (finance) at the telecom specialist. The company also reported that it has received a request from the SEC for additional information related to the issues raised in the letter.
Global Crossing management said it is cooperating with the Commission. “Although the company had determined that the allegations made by Mr. Olofson were without merit and that the issues raised in his letter had been properly addressed in the company’s news releases and its filings with the SEC, the company’s January 28, 2002 bankruptcy filing and recent events not involving the company have created a heightened sensitivity to any alleged accounting improprieties,” Global Crossing said in a real long sentence.
Besides filing for bankruptcy on Jan. 28, Global Crossing management says it also finally disclosed to accountancy Andersen the existence of Olofson’s letter and provided a copy of the letter to the auditor the following day. That was also the first day it first disclosed the letter’s existence to the audit committee.
A day later, Global Crossing also disclosed the letter’s existence to the current members of the company’s audit committee, and on January 30, 2002 provided copies to these individuals.
Global Crossing says Olofson claims that it was improper for the company to have reported pro forma values for cash revenue and adjusted EBITDA because the numbers are not measures of cash receipts or earnings. The company also says Olofson asserts that the pro forma numbers were allegedly inflated by including amounts for which cash was not received or where there had been non-monetary exchanges of capacity.
- Superior Financial Corp. said it would delay the release of its 2001 earnings pending review of the company’s financial statements by management and Ernst & Young, LLP. Superior Financial recently dismissed its controller.
“The Board has requested that management conduct a thorough review of accounting practices under his tenure with the company, with reference in particular to the recent non-recurring technology conversion expense representing approximately $1.7 million after tax,” the company noted in a statement. As soon as the review is completed, Superior management says it will promptly release earnings and announce a restatement of earnings for any prior periods to account conservatively for the conversion.
- Accounting scandals have even started cropping up in the Great White North. The share price of Proprietary Industries Inc. plunged 58 percent on the Toronto Stock Exchange on allegations of “significant accounting irregularities” in its financial statements.
On Friday, the Alberta Securities Commission said the company’s financial statements for 1998, 1999 and 2000 contain significant accounting irregularities. Proprietary Chief Executive Peter Workum said Monday the allegations are ill-founded. “Our goal as management is to ensure that the facts ultimately get put before the public,” Workum told Reuters. “I think we need to publish decent financial results and proceed with running our business and the truth will come out in respect to these allegations.”
Very Briefly Noted
- Meg Whitman, president and chief executive of eBay Inc., donated $30 million to her alma mater, Princeton University, for a new student dormitory. The complex, which is expected to break ground in 2004, will house 500 students, and will include a dormitory, dining and recreational space. Whitman graduated in 1977 and played on the school’s squash and lacrosse teams. Her shares in eBay are currently worth about $656 million. No word on whether the dormitory will be built in the shape of a giant Pez dispenser.