The din of over corporate accounting, touched off by WorldCom’s $3.8 restatement, got a whole lot louder yesterday.
On Thursday, no less than SEC chairman Harvey Pitt, Treasury Secretary Paul O’Neill and President Bush each publicly promised to get very tough on corporate criminals.
And, perhaps, not coincidentally, the stock market enjoyed a strong day for a change.
For example, the SEC said that beginning August 14, CFOs and CEOs of public companies with revenues exceeding $ 1.2 billion in the past fiscal year must provide written statements, under oath, regarding the accuracy of their companies’ financial statements.
In addition, the execs must declare in writing, under oath, whether or not the contents of the statement have been reviewed with the company’s audit committee, or in the absence of an audit committee, the independent members of the company’s board of directors, according to the SEC.
The Commission said these new tough rules are necessary because of “recent reports of accounting irregularities at public companies, including some large and seemingly well-regarded companies.”
The Commission added it wants to “provide greater assurance to the Commission and to investors that persons have not violated, or are not currently violating, the provisions of the federal securities laws governing corporate issuers’ financial reporting and accounting practices.”
Regulators at the SEC also want to see if it’s necessary for the Commission “to adopt or amend rules and regulations governing corporate issuers’ reporting and accounting practices and/or for the Commission to recommend legislation to Congress concerning these matters.”
“We are going to take away excuses,” said Treasury Secretary Paul O’Neill in an interview Thursday on ABC’s Good Morning America. “If CEOs and CFOs certify what is true, and if they falsely certify, they are going to go to jail, and we think that is the right step.”
O’Neill also said that President Bush and Congress are working on a law that would give the SEC the ability to go after the money that execs have reaped from their companies, “so that they don’t get away with ripping off millions or even hundreds of millions of dollars and leaving everyone in the lurch,” O’Neill said. “We want the law to be strong enough (so that) the SEC would even be able to go in and freeze accounts and freeze assets, so that while these cases are being litigated the money doesn’t flow away and can be redistributed to the employees and shareholders.”
Meanwhile, President Bush made his second comment in two days after WorldCom’s stunning news, saying he is “concerned about the economic impact of the fact that there are some corporate leaders who have not upheld their responsibility.”
Speaking to reporters before his meeting with Russian President Vladimir Putin at the G-8 meeting in Alberta, Bush warned, “If you are a responsible citizen and you run a corporation in America, you must fully disclose all assets and liabilities, and you must treat your shareholders and employees with respect.”
In fact, next month Bush plans to deliver a speech solely addressing corporate governance issues, according to wire service reports, citing an administration official.
House to Subpoena WorldCom CFO, Others
No surprise, Congress is also determined to figure out who knew what and when at WorldCom.
The House Financial Services Committee said Thursday it will subpoena three current and former executives of WorldCom — including former CFO Scott Sullivan — for hearings scheduled for July 8 that will look into the nearly $4 billion fraud committed by WorldCom.
Subpoenas will also be issued to: Bernard J. Ebbers, former CEO of WorldCom; John W. Sidgmore, current president and CEO of WorldCom, and Jack Grubman, a telecommunications analyst at Salomon Smith Barney. Grubman has become something of a lightening rod for the colossal collapse of a slew of telecom companies.
“The WorldCom news dramatically underscores the need for legislative and regulatory reform,” said Chairman Michael G. Oxley (OH). “Problems with accounting in telecommunications are, unfortunately, damaging a key growth sector of the economy that is already facing other, steep challenges.”
“We are in a very difficult period, having endured attack, recession, and war,” Oxley added. “Regulatory and legislative responses are already well underway, and we need to push those forward to completion as soon as possible. I urge the full Senate to act, so that we may conference corporate responsibility legislation as soon as possible.”
The Witch Hunt is On
It’s bad enough that seemingly a company each day is embroiled in some sort of scandal.
Now companies are finding it necessary to refute rumors of accounting scandals — before the scandals even occur.
On Thursday, at least two major companies — General Motors and Clear Channel Communications Inc. — had to convince investors that their accounting is by the book.
A GM spokesman late in the day read a statement to reporters, saying, “General Motors is not subject to an accounting investigation and strongly believes that its accounting is appropriate. GM believes that rumors of irregularities in its accounting are unfounded.”
Clear Channel president Mark Mays said in a written statement, “There is not a SEC investigation of Clear Channel and there are no accounting issues or irregularities. Clear Channel has a long history of very conservative business practices that are well documented in 30 years worth of financial statements.”
Ford Unit May Have Bookkeeping Problems
As it turned out, however, accounting irregularities were discovered at Ford Motor Co. unit Kwik-Fit, according to FT.com.
Ford was warned by its auditor, PricewaterhouseCoopers, that liabilities were understated by $3.4 million in Kwik-Fit’s accounts during due diligence for the auction of the unit, according to the web site of The Financial Times.
The upshot is that Kwik-Fit received goods from suppliers but failed to account for the cost as invoices had not been sent, according to the report.
“Kwik-Fit Great Britain’s senior finance team were posting inappropriate entries to stock accrual accounts, which served to reduce the liability for stock accruals,” according to ft.com, citing a confidential document.
SEC Files Case Against E&Y Unit
The SEC Thursday brought a settled enforcement action against Moret Ernst & Young Accountants (Moret), a Dutch accounting firm now known as Ernst & Young Accountants, in the first-ever U.S> auditor independence case brought against a foreign audit firm.
The Commission’s action arises from Moret’s joint business relationships with an audit client. The SEC censured Moret for engaging in “improper professional conduct” and ordered Moret to pay a $400,000 civil penalty.
“This is the first time that the SEC has ordered any audit firm to pay a civil penalty for an auditor independence violation,” the SEC noted. Moret consented to the order without admitting or denying the SEC’s findings.
“An auditor’s independence must be beyond reproach,” said Stephen Cutler, director of the SEC’s Division of Enforcement. “The financial reporting process and the law demand no less. When an auditor enters into a joint business relationship with an audit client to generate revenue, its independence is fundamentally impaired.”
“Auditor independence has no geographic limitations,” said Paul R. Berger, an associate director of enforcement at the SEC. “Regardless of location, auditors have a fundamental obligation to ensure their independence. Investors have a right to expect that any audit firm, foreign or domestic, has no improper business ties to its audit client.”
Moret audited the 1995, 1996, and 1997 financial statements of Baan Company, N.V., a Netherlands-based business software company whose stock traded on the Nasdaq National Market. During this period, consultants affiliated with Moret had joint business relationships with Baan that impaired Moret’s independence as auditor, according to the SEC.
Most of these joint business relationships were established to allow Moret consultants to assist Baan in implementing its software products for third parties, the Commission added.
The joint business relationships included a Dutch government-subsidized project for Moret and Baan to jointly develop faster software implementation tools; an agreement to coordinate global efforts in implementing Baan software products for third parties; joint marketing activities emphasizing the “partnership” and overall coordination between Baan and Moret in the implementation of Baan software products; and Baan’s use of Moret consultants as subcontractors and temporary employees in servicing Baan’s clients.
Altogether, the SEC found that Moret consultants billed Baan approximately $1.9 million from these joint business relationships during the years in question. According to the SEC’s order, Baan disputed, and ultimately did not pay, approximately $328,000 of these billings, which further impaired Moret’s independence as auditor.
The SEC also found that, when Moret audited Baan’s 1997 fiscal year financial statements, Moret improperly used and relied on audit work performed by its affiliated firm in the United States, Ernst & Young LLP. At the time, E&Y also lacked independence from Baan due to joint business relationships it had with Baan, according to the SEC.