It just gets uglier by the day.
While regulators, investors, and employees were still numb from WorldCom’s stunning announcement earlier in the week that the telecommunications company would be lowering stated earnings by nearly $4 billion, on Friday two marquee companies announced restatements of their own.
One was massive. Early Friday morning, management at Xerox Corporation said in a government filing it had inflated revenue by $1.9 billion from 1997 through 2001.
Then, as most people headed home for the weekend, management at The Walt Disney Company revealed that prior filings mistakenly included certain non-cash charges.
According to a Disney filing with the Securities and Exchange Commission, the media company on June 17 filed supplemental information regarding the pro forma impact of eliminating goodwill and intangible asset amortization for fiscal years 1999 through. But according to Disney management, the adjusted earnings and earnings per share figures in the supplemental information “should have excluded all goodwill and intangible asset amortization but, inadvertently, the respective amounts for fiscal 2001 and 2000 did not eliminate all of the goodwill and intangible asset charges associated with the Internet Group.”
Of course, if Corporate America not been suffering from its biggest crisis in confidence since the Great Depression, Disney’s announcement would have been a minor blip on the radar screen. But these days, any restatements or accounting errors generate headlines.
Xerox’s announcement, on the other hand, is clearly more serious. Management at the embattled copy-maker said in a delayed 10-K filing that the company lowered previously stated equipment sales from 1997 to 2001 by $6.4 billion — more than twice as much as the company acknowledged in April.
Back in April, Xerox agreed to pay a $10 million fine as part of a settlement with the SEC. The Commission had asserted that the copier company’s management schemed to defraud investors during a four-year period by using what it called “accounting actions” and “accounting opportunities” to meet or exceed Wall Street expectations and disguise the company’s true operating performance.
The SEC said at the time Xerox accelerated the recognition of equipment revenue by more than $3 billion and increased its pretax earnings by approximately $1.5 billion.
But on Friday, management at the document management company said the reversal of equipment sale revenue was larger than initially expected, primarily due to a change in the company’s lease accounting in Latin America from equipment sales to rental.
In addition to the reallocation of revenues, the restatement includes a $368 million reduction in pre-tax income, due mostly to the timing of the establishment and release of certain reserves, including restructuring reserves and the timing of recognition of interest income on tax refunds.
Last October, Xerox switched auditors, from KPMG to PricewaterhouseCoopers. In a statement, KPMG management said: “KPMG remains firm in its conviction that the financial statement reported on by us in May 2001, including Xerox’s financial statements for 2000 and the restated financial statements for 1997-1999, were fairly presented in accordance with generally accepted accounting principles.”
Management at the accounting firm added: “KPMG, Xerox and PricewaterhouseCoopers had it right the first time, when the company and three separate teams from (PricewaterhouseCoopers) all agreed with us that Xerox’s lease accounting methodology was GAAP compliant.”
Maybe so. But clearly, something was wrong with Xerox’s bookkeeping for several years. The company overstated its pretax income by $1.4 billion, or 36 percent.
Indeed, the restated numbers paint a very different picture of the company’s performance than Xerox’s original numbers indicated. In 1998, for example, Xerox actually generated a pretax loss of $13 million — but reported a $579 pretax profit. “Xerox today closes a difficult chapter in the company’s history,” said Xerox chairman and chief executive officer Anne Mulcahy. “With the filing of the 2001 10-K, we will have resolved the company’s accounting issues with the SEC and completed the restatement.”
That may not be the case, however. On ABC’s ‘This Week’ on Sunday, SEC chairman Harvey Pitt noted: “We’re not finished with the Xerox case…we knew there were problems,” Pitt said. “We told this company, not only must you disclose and restate what we know, we want to know everything. And that’s what they’ve now done. And now those who are responsible will pay.”
Pitt added: “Everyone who may have been involved — individuals, officers, directors and accountants — is still under investigation. And before much longer, we’re going to make all of them responsible for what they’ve done.”
No, this is far from over.
Pitt Bull, Burning Bush
SEC Chairman Harvey Pitt, however, did not reserve his tough words for just Xerox.
While on ABC’s ‘This Week,’ the SEC chairman also said no one, not even executives from companies like Halliburton who have ties with the current administration, will escape scrutiny. “People are going to pay heavily,” the SEC chairman warned.
And Pitt wasn’t the only capital markets official threatening retribution. Also appearing on the ABC show, New York Stock Exchange Chairman Dick Grasso warned: “We’ve got to root out the bad people, punish them. We’ve got to make certain that the accountants and the independent directors who oversee the more than 12,000 publicly traded corporations in America perform their job.”
Meanwhile, on his regularly scheduled Saturday morning radio program, President Bush also sounded a strident note, calling for new laws that would restore faith in the integrity of American business.
“The government will fully investigate reports of corporate fraud, and hold the guilty parties accountable for misleading shareholders and employees,” he said. “Executives who commit fraud will face financial penalties, and, when they are guilty of criminal wrongdoing, they will face jail time.”
The President added that no violation of the public’s trust will be tolerated. “The federal government will be vigilant in prosecuting wrongdoers to ensure that investors and workers maintain the highest confidence in American business.”
Critics charge that the President’s tough words come much too late, however. Shareholders of Enron, WorldCom, GlobalCrossing, and Xerox, among others, have taken a beating as a result of accounting mistakes and misdeeds. What’s more, so far, not one corporate executive at any major company has been charged with a crime since Enron Corp.’s fraud became public knowledge back in the fall.
Some observers believe that the public will not take the President’s and the SEC Chairman’s threats seriously unless a few high-profile CFOs and CEOs end up spending time behind bars for misleading the investing public.
WorldCom’s Monday Morning Deadline
Meanwhile, executives at WorldCom were no doubt burning the midnight oil this past weekend as prepared to explain their $4 billion accounting blooper to the SEC.
Chairman Pitt said he has demanded a detailed report from WorldCom before the stock market opens Monday about the extent of its accounting inaccuracies and how they came about.
“We’re demanding that they make a statement under oath telling the American public exactly what went on there and what their true financial condition is,” Pitt said on ABC’s ‘This Week.’ “If there’s one iota of false statement in there, people will pay heavily.”
The report will be made public “the minute we get that,” Pitt added.
As CFO.com reported,management at WorldCom Inc. dropped a bombshell Tuesday night when it announced it would restate the company’s results for 2001 and the first quarter of 2002. The reason for the restatement? WorldCom management said it discovered more than $3.8 billion in costs that were not properly documented.
The company’s management said an internal audit determined that certain transfers from line cost expenses to capital accounts during this period were not made in accordance with generally accepted accounting principles (GAAP). Specifically, the company appears to have classified things like line-fees paid to other carriers, as well as network maintenance, as capital investments, not costs. Hence, WorldCom was able to depreciate the investments, lowering its taxable income.
In other WorldCom-related news:
- Management at the besieged telecom company agreed with the SEC’s request that a judge name a monitor to oversee executive compensation and make sure the company doesn’t destroy documents.
- State governments may have lost more than $1 billion on investments in securities sold by WorldCom Inc., according to reports.
- New York State Comptroller Carl McCall said his state’s retirement system lost about $200 million on shares of WorldCom, its largest ever on one investment.
- The California Public Employees’ Retirement System, the biggest U.S. pension fund, estimated it lost $565 million on WorldCom’s stocks and bonds.
The Return of Massive Layoffs
It’s been months since companies have announced wholesale layoffs.
But, in the past few days, a number of companies –mostly in the telecommunications industry — have started swinging the ax again.
Last Friday, WorldCom began handing out pink slips to the first of 17,000 workers it plans to fire in the wake of its $3.8 billion accounting error.
In addition, Motorola Inc. said it will can another 7,000 jobs to cut costs. Motorola’s payroll fell to 111,000 workers at the end of 2001, down from 150,000 in 2000.
And last Wednesday, French telecommunications equipment maker Alcatel said it will cut another 10,000 jobs as part of a new restructuring plan.
Meanwhile, management at French computer services and consulting firm Cap Gemini Ernst & Young said Thursday it will cut 5,500 jobs, or 10 percent of the company’s work force, over the next six months. The main reason for the cuts: The big decline in the telecommunications and financial services businesses.
And finally, management at Qwest Communications International said on Friday it asked employees to take unpaid leave as the local telephone company tries to cut costs and slice its $26 billion debt load. Qwest, which has about 57,000 workers, said the voluntary program would run from July 1 through the end of September.