Whistleblower Right: Duke Understated Profits

Utility offers to pay $25 million to settle case; it all started when finance staffer called ethics hotline in 1998. Plus: spook may head PCAOB, former GE exec pleads guilty to insider trading, and they're driving out the sharks in Pennsylvania.

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If you ever needed any proof that monopoly businesses operate differently than free market companies, read on.

Duke Power, Duke Energy Corp.’s regulated utility, apparently understated — yes, understated — earnings by more than $123 million from 1998 to 2000. The understatement was discovered in an independent audit conducted by Grant Thornton LLP.

Duke management promptly said the utility would pay a $25 million penalty to customers as part of a settlement filed Tuesday.

Parent company Duke Energy indicated it will take a $19 million charge against fourth-quarter earnings to reflect the settlement.

The audit was commissioned by regulatory agencies in both North Carolina and South Carolina and funded by Duke Energy after a whistleblower, Barron Stone, charged that the company understated its results.

Stone, a certified public accountant who worked in Duke Power’s finance department from September 1997 to August 2000 had called the company’s ethics hotline with concerns about accounting irregularities when the company was closing its books in 1998. Stone now works as a senior forecast analyst in Duke Energy’s corporate controller’s office.

According to Grant Thornton’s audit, “a number of Duke mid- to senior level managers met and developed a plan to identify expense and revenue items which could serve as a basis for accounting adjustments which could be made to ‘avoid reporting over-earnings to regulators.'”

The adjustments had the effect of minimizing Duke’s return that was reported to regulators. However, it did not impact the financial results filed with the SEC.

In a response to the review published on its Web site, Duke management stated that it agrees with some of Grant Thornton’s findings and disagrees with others.

“Duke Power believes its business practice of analyzing and monitoring its regulated business results has been wrongly described by Grant Thornton as an inappropriate attempt to ‘manage’ its reported regulated return,” the company’s management noted. “In fact, a regulated utility is required to analyze and report its position relative to its benchmark return.”

Duke management added: “At the request of the Commissions, on August 28, 2001 Duke Power filed a complete written report. The report found that nine issues were accounted for correctly, four were one-time accounting errors, and one was a matter of accounting judgment. The report found no intentional wrongdoing by any Duke Energy employee.”

The company’s management went on to state that “the tone and presentation of Grant Thornton’s report inappropriately characterizes the business process followed, the accounting decisions made and the intent of our employees.”

The report singled out a number of Duke finance executives who were involved in discussions regarding accounting changes. Those executives include Rick Ealey, Duke Power’s assistant controller; Sandra Meyer, Duke Power’s vice president of planning and finance, and Jeff Boyer, Duke Energy controller.

Halloween Tale: Spook to Head Accounting Board?

According to FT.com, it looks like William Webster is the front-runner to head the new public company accounting oversight board (PCAOB).

As you may recall, Webster is the former head of the Central Intelligence Agency. He also served as director of the Federal Bureau of Investigation.

The web site said Webster met with regulators on Tuesday to discuss the job.

The Securities and Exchange Commission is under immense pressure to fill this position, given that Monday is the deadline for appointing the five-person board.

John Biggs, outgoing head of TIAA-Cref, is still a candidate, according to published reports. It appeared as if Biggs was going to be appointed last month. But when new of his imminent hiring was leaked in Washington, Republicans publicly protested because they felt they weren’t consulted. So, SEC chairman Harvey Pitt had to deny that he offered Biggs the job.

It’s not likely a whole lot of Republicans would be thrilled if Biggs got the top job at the new accounting oversight board. The TIAA-Cref head has a reputation as a shareholder activist and is considered a hawk on accounting issues.

Then again, Webster is not exactly an accounting heavyweight.

Former GE Cap Finance Executive Pleads Guilty

One more finance executive may be going to jail.

Anthony Chrysikos, a former vice president of finance in the aircraft services division of General Electric Capital Corp., pleaded guilty to insider trading charges. Reportedly, Chrysikos tipped off a kung fu instructor about GE’s purchase last year of Heller Financial Inc.

GE Capital announced it would offer to pay $5.3 billion in cash for Heller Financial on July 30, 2001.

Chrysikos, who was a member of GE Capital’s deal team, was charged with tipping off martial arts instructor Michael Martello three days before the offer became public, according to the report. Martello was living in Taiwan at the time.

Martello allegedly made $157,259 from Heller call options purchased before the deal was publicly announced. He sold those options right after GE Capital indicated it was going to buy Heller.

Chrysikos faces a maximum prison term of 15 years, although he could receive a lighter sentence under federal sentencing guidelines.

Why Sharks Don’t Swim In Pennsylvania

Warning to potential hostile acquirers: Don’t go after certain companies based in Pennsylvania.

On Tuesday, the state’s House of Representatives passed legislation that would require any suitor interested in buying a publicly traded Pennsylvania company controlled by a charitable trust to bring its case to the state attorney general. The attorney general could then require court approval for the deal. The legislation was drawn up in response to the recent takover frenzy surrounding Pennsylvania-based Hershey Foods , which is controlled by a charitable trust.

The bill, approved 154-43, goes to Gov. Mark S. Schweiker for his signature. Schweiker has reportedly not decided whether to sign the bill, however.

“The ultimate beneficiary of a charitable trust in Pennsylvania is the public,” Attorney General Mike Fisher told Reuters. “This legislation will ensure that a charitable trust, which is considering selling a business as part of its fiduciary duties, will consider how a sale will affect the workers at the business and the surrounding community.”

The bill would require charitable trusts to give the attorney general at least 60 days notice before they sell a company and 30 days notice to the company’s employees, according to the wire service’s account. It also would require the trust to show that the sale is necessary for the company’s survival or to further the purpose of the trust’s beneficiary.

Pennsylvania is one of a handful of states with a history of passing anti-takeover laws. In fact, in 1990 the keystone state passed what one of the most sweeping anti-corporate takeover laws in the U.S.

Interactive TV and Revenue Recognition

Two prominent players in the burgeoning interactive television industry have run into problems stemming from how they recognize certain revenue.

Management at Gemstar-TV Guide International, Inc., which has two divisions catering to the interactive business, said earlier this week that the company is being investigated by the SEC for possible securities laws violations.

The company earlier disclosed that it has been in discussions with the SEC regarding Gemstar’s recently completed internal accounting review.

Back in August, the company raised eyebrows when it reported it would restate 2001 results to reflect the reversal of about $20 million in revenues from its interactive television guide business. As a result, shares of Gemstar have plunged 90 percent this year.

On Oct. 9, the company’s chief financial officer, Elsie Leung, resigned.

Meanwhile, Liberate Technologies Inc., whose software is sold to cable and satellite TV operators for digital TV systems, said it would restate 2002 results due to a questionable license fee of $1.84 million.

Liberate management stated it “recently discovered facts calling into question the appropriateness and timing” of the licensing fee.

Managed Care’s Successful Rehab

Managed care, the health-care plan that many people love to hate, is starting to win over critics.

Or at least, that seems to be the upshot of a new survey conduced by Harris Interactive Health Care News. According to the poll, those who believe the trend to managed care is “a bad thing” have declined from 52 percent to 44 percent.

Those who think it is a good thing remain virtually unchanged at 36 percent.

Harris, which has conducted a managed-care survey each of the past seven years, also found that those who believe that managed care will “harm the quality of medical care” have declined from 59 percent in 2000 to 51 percent in 2002.

But it noted this change is not because more people think it will improve quality. Rather, there is an increase in those who think managed care does not have any impact on the actually quality of care a patient receives.

Half of the 1,011 participants don’t believe managed care will help contain medical care costs, however. Conversely, about a third of the respondents do believe managed care does help keep costs down.

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