Corporate Crime and Punishment

Legislation ushers in new era for company officers, accountants; lawbreakers could wind up behind bars. Plus: IBM buys Monday on a Tuesday, Mirant to restate, and Mr. Fastow to sell his dream house.


The moment was absolutely dripping with irony. Yesterday, a President who was elected, in large part, for his pro-business stance signed one of the toughest business-crime bills in the history of the United States.

In a ceremony in the White House on Tuesday, President Bush signed sweeping legislation aimed at deterring corporate fraud. While signing the bill, the President harkened back to the days of the Great Depression, calling the provisions of the legislation “the most far-reaching reforms of American business practices since the time of Franklin Delano Roosevelt.”

Added Bush: “No more easy money for corporate criminals, just hard time. This law says to every dishonest corporate leader: ‘You’ll be exposed and punished. The era of low standards and false profits is over. No boardroom in America is above or beyond the law.'”

The President promised that the arrests last week of five Adelphia executives was merely the opening salvo in the Administration’s plan to crack down on accounting abuses. Warning that the government will use all the tools at its disposal, Bush noted that the recently created corporate fraud task force “is just getting started.”

The antifraud bill, which was passed by Congress last week, creates a regulatory board to oversee the accounting industry and punish lawbreaking auditors.

In addition, the bill calls for stiff prison sentences for corporate officers who intentionally defraud investors.

“Free markets are not a jungle in which only the unscrupulous survive, or a financial free-for-all guided only by greed,” said Bush. “For the sake of our free economy, those who break the law—break the rules of fairness, those who are dishonest, however wealthy or successful they may be—must pay a price.”

AFL-CIO Offers Its Plan

While President Bush was signing the new corporate crime bill, the largest American union gathered the former employees of Enron, WorldCom, and Arthur Andersen for a rally on Wall Street.

Noting that “corporate greed cost 28,500 workers their jobs, and nearly $2 billion in retirement savings” at those three companies, John Sweeney, the president of the AFL-CIO, told the boisterous crowd that the United States faces a unique moment to make major changes in how corporations are run.

“We’re not going to restore confidence in the stock market, or renew trust in American business, or bring equity to our economy unless we seize this historic opportunity,” said Sweeney. “We have to hold CEOs accountable and put integrity back into the companies they lead.”

The AFL-CIO president then detailed a five-point plan to “put a stop to business as usual.” The proposal includes:

  • Getting the Securities and Exchange Commission and all three stock exchanges to agree to a single higher standard for publicly traded corporations.
  • Requiring companies to expense and index stock options they give CEOs—or ban them outright.
  • Prohibiting CEOs from selling their company stock while they are in office.
  • Outlawing the use of offshore tax havens.
  • Giving workers and their pension funds the power to choose corporate directors.

The reason for that last proviso? “So we can replace the yes-men and women and the rubber-stampers with genuinely independent directors,” explained Sweeney.

IBM to Buy PwC Consulting

IBM has agreed to buy PwC Consulting, PricewaterhouseCoopers’s global business consulting and technology services unit. The price of the acquisition: $3.5 billion in cash and stock

The IBM deal means PwC will now scrap its earlier plans to spin off its consulting unit in an initial public offering. PwC had planned to call that new company “Monday,” a choice that had many industry watchers baffled.

The transaction is expected to be completed around the end of the third quarter.

It appears IBM got a good deal in picking up the consulting unit. In 2000, Hewlett-Packard had reportedly agreed to pay a whopping $18 billion to buy PwC Consulting. That deal eventually fell apart.

“The client is the driving force behind today’s announcement with PwC,” said IBM CEO Samuel Palmisano. “Clients are not only looking for innovative ideas to improve their businesses, they are seeking a partner with deep business expertise and the ability to exploit leading open standards—based technology to turn these ideas into bottom-line business benefits.”

PwC CEO Samuel DiPiazza Jr. had similarly glowing words for the deal. “This transaction fulfills our commitment to fully separate PwC Consulting from PwC,” he said. “It will unleash the consulting unit from the regulatory restraints of our industry, and will allow the business to reach its full potential.”

Mr. Fastow Sells His Dream House

It appears Andrew Fastow may not be moving into Xanadu after all.

According to Reuters, the former Enron CFO is now planning to sell his palatial dream house in River Oaks, Texas, when it is completed in September. Rather than move into the 11,000 square foot mansion, located in Houston’s most exclusive neighborhood, Fastow will remain in his current home.

“He feels it would be less disruptive for his family,” company spokesman Gordon Andrew told the wire service. “He’s just trying to make life as normal as he can for them.”

Fastow’s current home is hardly a shack. Located in another upscale Houston neighborhood, the 4,666 square foot house is reportedly valued by the county at $700,000.

According to an Enron internal report, Fastow made at least $30 million off outside partnerships he created for the company. Those partnerships helped the Houston trading specialist keep debt of the company’s balance sheet. After the SEC insisted Enron management consolidate those partnerships—that is, put them on the balance sheet—Enron declared bankruptcy.

FASB Issues New Standard

The Financial Accounting Standards Board issued Statement No. 146, which requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan.

Examples of costs covered by the standard—”Accounting for Costs Associated with Exit or Disposal Activities”—include lease-termination costs and certain employee-severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity, said FASB in a press release.

Previous accounting guidance was provided by EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” Statement 146 replaces Issue 94-3.

“Liabilities represent present obligations to others,” said Linda A. MacDonald, FASB project manager, in a statement. “Because a commitment to a plan, by itself, does not create a present obligation to others, the principal effect of applying Statement 146 will be on the timing of recognition of costs associated with exit or disposal activities. In many cases, those costs will be recognized as liabilities in periods following a commitment to a plan, not at the date of the commitment.”

Mirant to Restate Financials

Management at Atlanta-based energy company Mirant said it will restate several balance-sheet items from its 2001 financial statements.

Those items include an $85 million overstatement of a gas-inventory asset, a $100 million overstatement of an accounts-payable liability, and a potential $68 million overstatement of an accounts-receivable asset. “These figures represent a fraction of Mirant’s $22.8 billion balance sheet reported as of year-end 2000,” the company’s management stressed in announcing the rejiggering.

“These issues were uncovered during consolidation of our corporate and Americas accounting groups and their effort to reconcile differences in asset accounts and liability accounts,” said Marce Fuller, Mirant’s CEO. “Our internal review has tentatively concluded that any mistakes were made honestly.”

Even so, the company said it has retained the King & Spalding law firm to conduct an independent review and provide advice to the company’s audit committee. That move was made, explained Fuller, “given the justifiable concerns that all investors share about accounting issues and disclosure in corporate America…”

Fuller said the bookkeeping issues will adversely impact financial results for the first or second quarters of 2002.

Short Takes

  • Management at Sprint Corp. said the company obtained commitments for a new $1.5 billion revolving bank credit facility, replacing an existing $2 billion facility. That facility would have expired in August 2003. The telco’s management said it has no plans to draw against the new facility. Sprint’s share price went up more than 13 percent on the news.
  • The SEC selected Paul Munter and David B. Smith as academic accounting fellows for a one-year term beginning August 2002.

For the past 14 years, Munter has been professor and chairman of the Department of Accounting at the University of Miami. He is a CPA and has a doctorate in accounting from the University of Colorado-Boulder, and bachelor’s and master’s degrees from Fresno State University.

He has also co-authored four books and monographs, and more than 150 articles and technical papers primarily on financial accounting and auditing matters in such journals as Journal of Accountancy, CPA Journal, Accounting Review, Behavioral Research in Accounting, and Practical Accountant.

As for Smith: he’s currently the Union Pacific Corp./Charles B. Handy Professor of Accounting at Iowa State University. He served as the ISU Department of Accounting chairman from 1998 to 2001.

Not surprisingly, Smith is a CPA and a chartered financial analyst. He holds a doctorate in accounting from the University of Illinois, a master’s degree in business administration from the University of Pennsylvania (Wharton School), and a bachelor’s degree from Carleton College in Northfield, Minnesota.

For the past two years, he has served on the SEC Liaison Committee of the American Accounting Association. Smith’s current research interests include issues related to revenue recognition, financial-statement disclosure of business-segment information, and the use of accounting information to value common stocks.

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