Washington Weighs In
Congress passed sweeping corporate reform in July, and President Bush signed the Sarbanes-Oxley Act, which contains a host of measures intended to prevent corporate fraud and restore investor confidence in financial reports. While politicians heralded the event as “historic,” corporate executives have been more subdued in their support. “It’s necessary, but we should never have come to this point,” says Brian Jarzynski, CFO of software firm Comshare, in Ann Arbor, Mich. “It’s reactionary instead of proactive.”
The act includes some key provisions that are likely to have, if not a profound impact on accounting and auditing processes, at least a conciliatory effect. Among the measures, the act:
- creates an SEC audit oversight board that has investigative and disciplinary powers.
- prohibits auditors from offering most consulting services to audit clients, and requires them to rotate partners among clients every five years.
- prevents companies from providing loans to their executives.
- raises the maximum penalty for securities fraud to 25 years, and to 10 years for destroying key financial-audit documents and E-mails.
Another provision requires CEOs and CFOs to certify that their financial statements fairly represent the financial conditions of the issuer. John Coffee, a law professor at Columbia University, says the act contains a key distinction that creates a higher standard of certification. “The word GAAP isn’t used,” he says. This means that in the event of fraud, even if filings are found to be technically in compliance with GAAP they can still be found to have misrepresented results.
But some of the new rules–the stiffer sentences for white-collar crime, for example–are more bark than bite. “If [Congress] were really serious about getting tough, it would have created minimum mandatory sentences,” says Steve Miller, a partner at Chicago law firm Sachnoff & Weaver.
The act will mandate practices many CFOs already have in place. “If you were doing things right in the first place, none of this is earth-shattering,” says Robert Leahy, vice president of finance at Brooktrout Inc., a Needham, Mass.-based telecom equipment maker. –Joseph McCafferty
There are not a lot of venture capitalists looking to flood Internet start-ups with cash these days, but that doesn’t mean the well is completely dry. In fact, after a long drought, a few deals are getting done.
In July, FurnitureFind Corp., which runs the site FurnitureFind.com, secured a seven-figure round of financing from HQ Venture Capital, based in Austin, Tex. “The smart VC money realizes that the cycle has been down for so long that the [Internet] companies that have survived must be doing something right,” says Stephen Antisdel, CEO of FurnitureFind. But, he says, getting the infusion wasn’t easy. HQ conducted four months of due diligence before committing the funds.
Other recent deals include Servicebench.com Inc., a maker of Internet-based software, which raised $1.25 million; and Nextone Communications Inc., which raised $3.5 million from Core Capital Partners and other investors.
Erik Brown, president of CGI Capital Inc., in Mundelein, Ill., says that VC firms are starting to put a toe back in the water. “There is so much money out there that has been on the sidelines for the last two and a half years,” he says. –J.McC.
In the Material World
An SEC proposal would in-crease the events that trigger an 8-K filing from 5 to 18, and include loss of a large customer, an officer’s departure, and changes in debt ratings.
A shortage of 10 million workers will occur in the U.S. over the next 10 years, according to the U.S. Bureau of Labor Statistics.
One Year Later
For the past year, New York Board of Trade (NYBOT) CFO Walter Hines has been grateful for a trading floor that is less than half the size his company had 13 months ago and a 50 percent longer commute from his home. Grateful, because the exchange’s original trading floor and offices, along with all of its paper records, were decimated in last year’s September 11 terrorist attacks.
Without the makeshift trading floor, built as a temporary backup facility after the 1993 World Trade Center bombing, the exchange operations could easily have fallen into disrepair as Hines rebuilt his books from scratch, sorted out insurance claims, and looked for a permanent space. Instead, NYBOT has thrived despite the constraints, expanding the facility twice to allow for longer trading cycles.
As the anniversary of last year’s attacks approaches, U.S. businesses are still sorting through the event’s lasting effects, both physical and psychological. They are putting the finishing touches on contingency plans, rethinking security measures, and planning for ways to commemorate the tragedy.
While few could have foreseen the extent of the damage wrought, Gartner estimates that fewer than 25 percent of large businesses had invested in comprehensive business-continuity planning as of the start of 2002, though that number is expected to rise to 70 percent by 2005.
Disaster recovery plans, ranging from securing alternative physical facilities to backup credit facilities, “are taking much more of a front seat,” says Glenn Eckert of Moody’s Investors Service. “They’re something we’re actively discussing with the companies we cover.”
New defenses at NYBOT include a third backup center and its first chief information security officer. But, says Hines, “the fact that things run smoothly today in our backup facilities doesn’t mean we’re back to normal.” He knows some employees are nervous about returning when trading shifts downtown to the New York Mercantile Exchange floor in mid-2003. “Things might never be back to normal.” –Alix Nyberg
Taking A Breather
In a Schwab survey in July, 55% of respondents described their investment strategy as “being on the sidelines.”
Paper or Plastic?
Jim Wooten was tired of replacing lost payroll checks. The controller of Franklin Covey Printing Inc. says that employees would lose them or accidentally run them through the washing machine. So he decided to mandate that all employees use direct deposit.
The problem, though, is that not all the 130 employees of the Salt Lake Citybased printer of day-planners have bank accounts. So Wooten turned to pay cards. The cards, issued by credit-card providers like MasterCard and Visa, allow employees to receive their pay on plastic cards that can be used like credit cards or at ATMs to retrieve cash. Companies that have recently installed pay-card programs include Sears, Roebuck and Little Caesars Enterprises.
“Paper checks are a nightmare in terms of reconciliation and replacement,” says Wooten. Indeed, MasterCard estimates that checks cost the average employer as much as $1.50 per check to issue when replacement, redistribution, and check fraud are factored in. After an initial fee of $3 per card, Franklin Covey pays 25 cents per transaction to load funds onto the cards. But most of the savings, says Wooten, is in the reduction of time to administer payroll. “I don’t have to run all the checks through the check signer,” he adds.
Businesses that have high turnover, lots of temporary employees, or a decentralized employee base are adopting the cards. “They are just now starting to catch on with companies in the hospitality, retail, food-service, and health-care industries,” says Michael Chittaro, vice president of new products at Citicorp EFS in Chicago, which issues MasterCard-branded pay cards.
Intrawest Retail Group Inc., a ski rental and retailer based in Golden, Colo., turned to pay cards when storms kept checks from being delivered to employees located at company outlets in five states. “Now we have a nearly automated process,” says payroll administrator Cindy Pacheco, “and employees aren’t sitting around waiting for checks.” –J.McC.
Corporate barter activity is expected to increase 20% by the end of 2002, says the International Reciprocal Trade Association.
Watch Your Balance
Are companies shortchanging pensioners? A recent study by the Department of Labor suggests that some employers that offer cash-balance plans might be. But critics of the study say the numbers just don’t add up.
The study, conducted by the DoL’s Office of Inspector General, claims that companies with cash-balance plans are underpaying employees who withdraw their pension plan balance before the traditional retirement age, to the tune of $85 million to $199 million a year.
At the heart of the controversy is IRS Notice 96-8, which requires employers to calculate future retirement benefits for a departing employee as if the employee had stayed until age 65. Companies must use the interest rate stipulated in their pension plan documents, but then compute back to net present value using the U.S. 30-year Treasury-bill rate. If the plan’s interest rate is higher than the T-bill rate, the present value of the benefits will be larger than the current balance held by the participant–a concept known as “whipsaw.” In 13 of the 60 companies it surveyed, the Inspector General’s office claims this was the case, but that companies paid out only the current plan balance, underpaying employees by a total of $17 million a year.
Some participants have sued employers, but the courts have come down on both sides of the issue, says James Delaplane, vice president of retirement policy at the American Benefits Council, a lobbying group for large firms. The problem is that Notice 96-8 was never finalized by the IRS. And with cases pending, relevant government agencies have declined to issue guidance. The IRS has a cash-balance project under way, but Delaplane says that to date it doesn’t address whipsaw.
To further cloud the issue, the DoL’s own assistant secretary for the Pension and Welfare Benefits Administration, Ann Combs, has questioned the study’s findings and has refused to commit additional resources to monitor the situation.
Meanwhile, the House has passed legislation that would bar the IRS from actions geared to change Notice 96-8, which in effect would codify the rule. The measure, proposed by Rep. Bernard Sanders (IVt.), an opponent of cash-balance plans, must now make it through the Senate, where its chances of passing are less likely. –Kris Frieswick
According to Shareholder Value magazine, 57.4% of companies surveyed have taken no action to secure investor confidence in their stock.
S&P 500 Index
Poor Canada. It’s bad enough that it’s viewed in the United States as a sort of prudish neighbor. Now, five of its biggest companies–including Nortel Networks Ltd. and gold-mining giant Barrick Gold Corp.–have been booted off the S&P 500, which is enforcing its U.S.-only rule for firms in the index.
“We are one of the largest gold companies in the world,” argues Jamie Sokalsky, CFO of Barrick Gold, “and we were arbitrarily ignored on a geographic basis because we have our head office in Toronto.”
But what about the U.S. companies that made news recently by moving their headquarters to Bermuda to lower their taxes? If giants such as Nortel and Barrick Gold got iced for geographic reasons, why do such newly minted Bermudians as Ingersoll-Rand and Tyco International still have a place on the index?
“We’re not a tax policeman,” explains S&P spokesman Michael Privitera. Some 10 companies with Caribbean headquarters remain on the S&P 500.
Sokalsky says he was initially shocked by S&P’s move, but takes comfort in research by the firm, which predicts no long-term impact on his company’s stock. And that’s not his only source of comfort. The day it was yanked from the S&P 500, Barrick discovered that its most recent exploratory site–believed to hold 3.5 million ounces of gold–actually contains more than twice that amount. Maybe S&P will call back. – Tim Reason
What About These Hosers?
S&P 500 firms with offshore registration.
|Company||Added to S&P 500||Headquarters||Tax Registration|
|Schlumberger||1965||New York||Netherlands Antilles|
|Noble Drilling||2001||Texas||Cayman Islands|
|XL Capital||2001||Bermuda||Cayman Islands|
|Ace Limited||2001||Bermuda||Cayman Islands|
Source: Standard & Poor’s
Corporate restatements were issued by 270 companies in 2001, according to a recent report by Huron Consulting Group.
Is Everybody Doin’ It?
For years, only two companies on the S&P 500 recorded their option grants as expenses: The Boeing Co., since 1998, and Winn-Dixie Stores Inc., since 1990. But in recent weeks, a stampede of companies has joined them.
“We saw this as one way to demonstrate that we are an open-book kind of company with good governance,” says Michael Coke, CFO of real estate investment trust AMB Property Corp., which announced its plan to expense options on July 8. He says the decision will ultimately reduce earnings per share by 2 to 3 percent. Six days later, the Coca Cola Co. shook up the finance world by announcing plans to do the same.
Since then, such firms as Bank One, American International Group, and The Washington Post have announced hat they, too, will expense their options. Even Amazon.com Inc. broke rank with options-heavy tech firms and announced that it will begin expensing options in the near future. (Microsoft and Intel recently reiterated their opposition to expensing options.)
But are these voluntary conversions simply a public-relations move by a select few, or are they the beginning of an inevitable trend? With the recent announcement that corporate leaders General Electric and General Motors will begin expensing options, the peer pressure many soon become to great to resist.
“I see it heading in that direction,” says Mark Slaven, CFO of Santa Clara Calif.-based 3Com Corp., who predicts that his company will likely have to expense options within the next two years.
Some companies, including 3Com, are concerned that the current company-by-company adoption could lead to inconsistency among valuations. The Gillette Co., for example, says it supports expensing, but is waiting for more guidance from standards-setters. “There must be one standardized, common approach,” says spokesman Eric A. Kraus. –T.R.
The debate over expensing is heating up.
|1. Warren E. Buffett, CEO Berkshire Hathaway||For||His long campaign to expense options finally began paying off.|
|2. George W. Bush, President, U.S.A.||Against||Nothing about options in his “Corporate Responsibility” speech.|
|3. Bill Gates, Chairman, Microsoft||Against||In July the company said it had no plans to change accounting rules.|
|4. Alan Greenspan, Chairman, Federal Reserve||For||Says options are one of the “avenues to express greed.”|
|5. Robert Herz, Chairman, FASB||For||“Most of the objections come from the corporate community.”|
|6. Joseph Lieberman, U.S. Senator (DConn.)||Against||He fears expensing could deny options to the middle class.|
|7. Harvey Pitt, Chairman, SEC||Against||Says expensing options not an issue until other controls put in place.|
|8. Sanford I. Weill, CEO, Citigroup||For & Against||Expense them for the top five executives only.|
Source: Company Data, News Reports
Nearly 36% of finance executives say they plan to stay in their current jobs, and 32% hope their next move will be retirement, says a survey by RHI.
IRS Rips Split Dollar
The assault on executive-compensation schemes continues. The latest victim is split-dollar life insurance arrangements. The IRS recently proposed regulations that would tax executives more heavily on the benefits of such plans, which could make them obsolete.
Split-dollar life insurance, in which an employer and an executive share the cost and benefits of a whole life insurance policy on the executive, has become a popular way to provide tax-beneficial deferred compensation to senior managers. Such setups are used by 56 percent of Fortune 1,000 firms to reward top brass, according to Vinings Management Corp., a consulting firm based in Marietta, Ga.
In early July, though, the IRS announced new regulations that would tax executives more heavily on the “current economic benefits” of the plan than the vague existing laws do, and would impose taxes on the cash value when the plan is fully transferred to them. Alternatively, executives will be able to own their plans from the outset, but will have to pay federally set interest rates on the premium payments they receive from their employers, since the payments will be treated as loans (although the new corporate-loan ban may affect the viability of this option).
The proposal has encouraged a last-minute effort to tweak–or ditch–split-dollar arrangements, before new and more-onerous tax regulations kick in. The IRS is accepting comments on the proposed rules until October and isn’t likely to finalize them until early next year. “The cost of doing such an arrangement is going to go up in the future,” says Andrew Liazos, director of the executive compensation practice at McDermott, Will & Emery’s Boston office. Any arrangements made before the rules are set in stone, however, will be grandfathered under the current favorable tax rules.
The IRS “hasn’t killed split-dollar,” says Susan McClain, a senior executive compensation consultant at Watson Wyatt Worldwide. “But it’s taken the structure we’ve known for 40-plus years and said, ‘That’s not applicable anymore.'” – A.N.
Short circuit: The tenure of CFOs is very short these days. They’re shown the door every 18 months, says Gray & Christmas.
Global Confidence Survey
After a cheerful forecast of an economic recovery three months ago, CFOs are once again concerned about future financial prospects at home and abroad. No doubt the scandals at WorldCom, Adelphia, and Tyco International–and the subsequent drop in the Dow and Nasdaq–have dampened their outlook. In fact, CFOs are the most pessimistic about the short-term prospects of the U.S. economy since December of last year, when the recession gave them good reason to be gloomy.
According to our Global Confidence Survey of U.S. finance executives, 58 percent of those who responded say their attitude toward the domestic economy in the next year is either “concerned” or “very pessimistic,” up from 19 percent in the last quarter. For the next five years they are more hopeful, with 77 percent reporting that they are “confident” or “very optimistic” about the future economy. Still, those figures are down from last quarter, when 90 percent of respondents had a positive view of the long-term economic picture.
When it comes to the global economy, CFOs are similarly glum. A full 45 percent of respondents were “concerned” about the global economy in the next year, and another 5 percent were “very pessimistic.” An additional 36 percent rated their outlook as “neutral.” Again, a longer time horizon brings more optimism, with 55 percent of respondents citing a favorable attitude toward the global economy in the next five years.
So just when do they expect things to brighten up? Not too soon. Only 16 percent expect a broad recovery to begin this year. Another 35 percent expect the recovery to begin in the first half of next year, while 29 percent say it won’t start until the second half of next year. And 20 percent aren’t looking for things to get a whole lot better until–gulp–2004.
The economic downturn itself is by far the biggest source of anxiety for finance executives. Nearly half ranked it number one on a list of their greatest business concerns. Other major worries include gaining access to capital and, despite relatively high unemployment, attracting and retaining employees. For the first time since the survey was begun in September 2000, “increased regulation” and “accounting concerns” weighed heavily on the minds of respondents, with 43 percent ranking one or the other among their top three concerns. These responses are likely a response to the Sarbanes-Oxley Act and the mandate from the Securities and Exchange Commission that executives certify their financial statements. Of those surveyed, 10 percent are planning a write-off by the end of the year and 8 percent are planning a business divestiture.
To be sure, concerns about unemployment, technology spending, and accounting woes linger. Even more cautionary is the survey’s finding that more CFOs plan to reduce capital spending next quarter; 24 percent say they will make cuts. Capital-spending plans for the fiscal year are more bullish: a stout 53 percent plan to increase spending. –J.McC.
CFOGlobal Confidence Survey Results
|Attitudes of U.S. CFOs in the next year:|
|Domestic economy||Global economy|
|Attitudes of U.S. CFOs in the next five years:|
|Domestic economy||Global economy|
|Next quarter’s performance predictions:|
|Capital Spending projections for the next:|