Dude, Where’s the Cash?

Musicians tell California lawmakers that accounting in their industry is not real good; Backstreet Boys claim they still owe money to record company. Plus: is Xerox treasurer being probed? Also: Dynegy settles with SEC, and CA clears its accounting.


It’s not everyday you see the Backstreet Boys, Bing Crosby and Generally Accepted Accounting Principles used in the same sentence.

Then again, it’s not everyday some of the most famous musicians in the world choose to discuss accounting when they find themselves in the glare of the spotlight.

Yet, this is exactly what happened in Los Angeles on Tuesday at a state hearing looking into royalty payments to musicians. The gathering was called by State Sen. Kevin Murray and fellow Democrat Sen. Martha Escutia.

During testimony, a group calling itself the Recording Artists Coalition, led by the Eagles’ Don Henley (no relation to Oracle CFO Jeff Henley), recounted how industry accounting practices robbed them of royalty payments.

The musicians told lawmakers they had sold millions of records, but received precious little royalties. In some cases, the musicians said they were told they owed their record companies money to recoup advances.

When questioned why this is, most of the musicians asserted that accounting in the music industry is based on arcane methods and deliberately vague language.

In fact, Kevin Richardson, one of the Backstreet Boys, testified that, even though his group has sold 70 million records since 1994, its record company “has said we’re still unrecouped. Nothing has changed in the music industry.”

Kathryn Crosby, the widow of Bing Crosby, claimed she and her family were cheated out of more than $16 million in royalties. “Bing’s movies still create business all over the world.” She reportedly said. “It would be very nice for Bing’s heirs to receive the proper amount.”

A representative of the Chambers Brothers said the group received just a few dollars even though its 1968 breakout hit, “Time Has Come Today,” had been featured in over 40 films and television programs.

“Surely greater transparency in recording contracts is needed,” Murray told Reuters.

The coalition is reportedly seeking legislation that would impose penalties on record companies for accounting errors.

Executives from the recording industry, however, said the percentage of royalty disputes was actually low.

“The relationship between record companies and recording artists has always been subject to the dramatic — and sometimes melodramatic — highs and lows that characterize all creative partnerships,” reportedly said Paul Robinson, senior vice president of Warner Music Group. “This royalty dispute is regrettably distracting all of us from the very pressing need to band together on … business fronts to combat the rampant online piracy, which is taking a huge toll on the record business.”

Dynegy Settles With SEC

Dynegy Inc., the Houston-based energy trading company that at one point tried to buy Enron, agreed to pay a $3 million penalty as part of a settlement with the Securities and Exchange Commission. The settlement stems in part from the company’s use of “round-trip” trades to boost revenues.

This is the SEC’s first enforcement action relating to ’round-trip’ trades — a practice that seems to have been common in the energy trading business.

The Commission said Dynegy engaged in improper accounting and misleading disclosures relating to a $300 million financing transaction, known as Project Alpha, involving special-purpose entities (SPEs). The SEC also claimed Dynegy overstated its energy-trading activity resulting from those controversial round-trip, or “wash,” trades.

Such deals are simultaneous, pre-arranged buy-sell trades of energy with the same counter-party, at the same price and volume, and over the same term. The trades result in neither profit nor loss to either transacting party. Instead, they are intended to boost transaction volume.

The SEC accused Dynegy of engaging in securities fraud in connection with its disclosures and accounting for Project Alpha, and negligently included materially misleading information about the round-trip energy trades in two press releases the company issued in early 2002.

“Public companies using off-balance sheet, special purpose entities must ensure not only that their accounting treatment complies with GAAP, but also that they have accurately portrayed the economic realities of the transactions,” said Harold F. Degenhardt, administrator of the commission’s Fort Worth Office. “In this case, Dynegy portrayed as operating cash flow what was essentially a loan. As a result, Dynegy investors were deceived.”

Interestingly, Stephen M. Cutler, director of the commission’s enforcement division, noted that the $3 million penalty imposed against Dynegy reflected the commission’s dissatisfaction with Dynegy’s lack of full cooperation in the early stages of the SEC’s investigation.

“Just as the Commission is prepared to reward companies that cooperate fully and completely with agency investigations, the Commission will also penalize those who do not,” he added. “If companies wish to receive the maximum benefit from their cooperation, the cooperation must be complete and meaningful from the outset. Companies would be well advised to familiarize themselves fully with the Commission’s Section 21(a) report on cooperation issued on October 23, 2001.”

CA’s CEO Says Accounting is Cleared

Computer Associates (CA) CEO Sanjay Kumar said an independent review commissioned by the company’s outside directors found the software giant did not violate accounting rules.

Speaking to a group of fund managers and shareholder activists at the Council of Institutional Investors’ Fall Conference, Kumar reportedly said the review by PricewaterhouseCoopers — under the direction of Computer Associates board member Walter Schuetze — unearthed no irregularities. The review apparently covered CA’s accounting of the third and fourth quarters of fiscal 1998. Kumar added that accounting used for the period ended March 1998 followed Generally Accepted Accounting Principals. (CA’s cost management could stand some improvement, however.)

Law enforcement officials are reportedly investigating whether Computer Associates inflated its results so that top executives could cash in $1.1 billion of stock options. Those options were reportedly linked to the performance of the company’s stock price during that period.

“PwC has concluded in its study that they, PricewaterhouseCoopers, have found no accounting irregularities or violation of GAAP,” Kumar told the audience, according to Reuters.

The report has been turned over to the SEC and the U.S. Attorneys Office, Kumar said.

Stay tuned.

Xerox Treasurer Facing Probe

Xerox treasurer Greg Tayler, along with several other people involved with the company’s financials, could face a civil charge related to an investigation by the SEC into the copier maker’s accounting practices, according to The Wall Street Journal.

Xerox has already settled this case with the commission.

The Journal, citing people familiar with the criminal investigation, said FBI agents, working with the U.S. Attorney’s Office, recently questioned James Bingham, a former assistant treasurer at Xerox. Bingham claims he was fired for trying to rein in unethical accounting at the company.

Information provided by Bingham was said to be crucial to the SEC’s civil case against Xerox. Earlier this year, management at the document specialist agreed to pay a $10 million fine and restate the company’s financial results dating back to 1997.

Despite the settlement, the SEC has reportedly issued Wells notices to Xerox’s former accountant, KPMG, plus a number of former and current KPMG and Xerox employees. Such notices mean recipients could still face civil charges.

In addition to Tayler, previously unidentified Wells receivers include Philip D. Fishbach, a former Xerox controller, and Daniel Marchibroda, a former assistant controller, according to The Journal.

The SEC’s case is separate from any federal criminal probe. The article in the Journal points out that there is no indication that any of the Wells-notice recipients are targets of the federal inquiry.

According to the SEC, in November 1999 former Xerox CFO Barry Romeril told senior Xerox management that when accounting actions were stripped away, Xerox had essentially “no growth” through the late 1990s.

Bingham, the onetime assistant treasurer at Xerox, has reportedly charged that Xerox canned him in 2000 after he repeatedly questioned the company’s accounting practices.

Bingham reportedly told the SEC in depositions that Xerox’s culture in the late 1990s was one in which accounting trickery was routinely used to conceal deteriorating underlying results. In fact, E-mails sent by Bingham in mid-2000 are credited with uncovering the entire scandal.

For its part, Xerox management has tried to portray Bingham as a disgruntled former employee.

Xerox’s accounting problems were initially thought to be an isolated problem at its Mexico unit. However, in mid-2000 Bingham apparently sent an E-mail to his boss, then-treasurer Eunice Filter, warning that Xerox’s accounting problems extended beyond Mexico.

According to published accounts of a wrongful-termination suit brought by Bingham, Filter told him not to distribute it, asking whether he “wanted people to go to jail.”

Bingham then apparently sent the E-mail to Xerox’s current chairwoman and CEO Anne Mulcahy, as well as Romeril. But Filter’s assistant ordered him to recall and “destroy” it, according to the Journal’s account, citing an internal message.

Xerox called the directive to destroy the message an “unfortunate selection of words,” noting that Filter wanted first to investigate the allegations before forwarding them to her bosses. Filter called Bingham’s allegation “inaccurate.”

Disney Board Approves Governance Changes

Whether it felt the pressure of institutional investors or the winds of corporate change, management at Walt Disney took another step toward better corporate governance yesterday.

The reeling media giant didn’t take action on shrinking the size of its board or improving the independence of that body. It did increase the size of its corporate governance and nominating committee, however, appointing board members Judith Estrin and Monica Lozano.

This was in line with recommendations from the company’s governance consultant, Ira Millstein.

Disney also named former U.S. Senator George Mitchell as co-chairman of the committee, along with current board member Stanley Gold.

“Today, we furthered our commitment to enhanced governance by expanding the capacity of our governance and nominating committee to address recent legislative and regulatory developments and ensure that Disney remains among the most progressive boards in America on governance issues,” chairman and CEO Michael Eisner said.

The company is also mulling the reduction of the company’s 16-member board to as few as 12 members. But such a move would require resignations. Those aren’t expected until at least year-end, according to reports.

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