New Law Firm? Probe Restate & Delay

Bristol-Myers, Qwest, among others, to delay 3Q results; restatements and probes to blame. Plus: SEC sues Chicago's former treasurer, and pension plan woes bite Honeywell, SBC, and Boise Cascade.


The accounting contagion continues.

On Thursday night and Friday, more than a half-dozen companies either indicated they would delay the filing of their financial reports, announced revenue restatements, or were identified as targets of government investigations.

This is in addition to the half-dozen or so companies that had announced restatements late last week.

Both Bristol-Myers Squibb and Qwest Communications International reported that they would be delaying the filing of their quarterly information. Management at pharmaceuticals giant Bristol-Myers acknowledged the company will file its third-quarter 10-Q in February—three months late—due to the expected restatement of the company’s sales and earnings for 2000, 2001, and the first two quarters of 2002.

In late October, the drug company’s management said it would restate more than $2 billion in sales as a result of the company’s accounting for its wholesaler inventory in its U.S. pharmaceuticals unit. The company expects to restate sales and earnings upward for 2002 and downward for prior periods that were affected, primarily in 2000 and 2001.

Bristol-Myers, a triple threat, is also being investigated by the Securities and Exchange Commission.

Meanwhile, Qwest announced the bankrupt telco won’t file its third-quarter report on time because the company’s management can’t determine when it will complete adjustments due to an expected restatement.

Earlier this year, the embattled telecom company began an analysis of revenue recognition and accounting treatment for optical-capacity asset sales—particularly sales to customers from which the company agreed to purchase optical-capacity assets.

The company’s management is also looking into the sale of equipment by the company to certain customers as well as certain accounting policies and practices with respect to its Qwest Dex Inc. directories business. That probe apparently includes, among other things, the changes in the production schedules of some of its Qwest Dex directories.

The company noted in its filing Friday that it will restate prior periods as a result of its determination that certain accounting policies may have been inappropriately applied and certain transactions were recorded incorrectly.

Qwest management said it would only file its quarterly report when its restatement is complete, its auditor (KPMG) has completed a reexamination of the company’s books, and the company’s CEO and CFO are able to certify the results. Qwest indicated it could not state with certainty when these events will be completed, however.

Restatements Du Jour

Meanwhile, agrochemical giant Monsanto Co. said Friday it notified the SEC that it discovered financial and compliance “irregularities” at its Indonesian affiliate during a routine internal audit.

The company claimed it terminated foreign-national employees allegedly involved in the foul-up.

Monsanto noted it would cooperate in any SEC review of the matter. The discovery won’t likely have a material effect on the company’s financial position, though. According to Monsanto, its Indonesian operations earned just $1 million for the nine months ended September 30, accounting for less than 0.8 percent of the company’s total revenue for the period.

Monsanto spokeswoman Lori Fisher told Reuters the matter involved record keeping. “This came about during a routine internal audit and follow-up made by Monsanto management and outside counsel,” she added. “These irregularities violated our internal global standards of practice. We have not concluded our internal review yet.”

In the same quarterly filing, Monsanto said its goodwill impairment tests under SFAS 142 resulted in a $2 billion impairment charge relating to its corn and wheat reporting units, due to acquisitions in 1997 and 1998.

In other restatement news:

  • The Trust Company of New Jersey announced it would restate its earnings by $3.1 million for the past seven quarters as a result of bookkeeping errors related to its indirect automobile-lending portfolio. The company added that the effect of the restatement will be to reduce the historic interest income of the indirect-automobile lending business.

“We are certainly disappointed by this announcement and the company has taken steps to correct the calculation of the interest income of the business for future periods,” said Alan J. Wilzig, the company’s CEO, in a statement. “These bookkeeping errors date back to the beginning of 2001 and were uncovered by our management team in conjunction with our new independent auditors, KPMG.”

  • And management at Lydall Inc. said the company will restate its 2001 net income by about $500,000 because of an accounting irregularity discovered at its Columbus, Ohio, automotive operation.

The company’s management became aware of a possible accounting irregularity on November 6 and commenced an investigation immediately.

Apparently it didn’t take long for Lydall’s management to uncover some problems. Just three days after initiating its internal inquiry, the company’s management said “it was clear that certain Columbus employees, acting in collusion, had circumvented the local internal control system by delaying accounting recognition of expenses and accordingly, caused misstatements of reported earnings.” The employees allegedly behind the scheme have been terminated.

“Obviously, I am deeply disappointed by the unethical conduct of two persons at our Columbus operation,” said Christopher Skomorowski, Lydall’s CEO, in a statement. “Although the absolute dollar amounts involved are not large, I want to set the record straight as quickly as possible. Integrity and ethical business conduct are core values of Lydall.”

Earth Probes

On Friday, Fifth Third Bancorp said federal regulators are investigating a $54 million charge taken by the company in the third quarter. As a result, the banking giant’s stock price plunged 8 percent on Friday.

Fifth Third noted in a regulatory filing Friday it had received a supervisory letter from the Cleveland Federal Reserve and the Ohio Department of Commerce related to procedures for accessing ledgers, the separation of duties, procedures for reconciling transactions, and the hiring of consultants.

The bank also indicated that the Ohio regulators will hold up future acquisitions (including Fifth Third’s planned purchase of Franklin Financial Corp.) until the supervisory letter is withdrawn.

Also last week: Allmerica Financial Corp. reported that the SEC is conducting an informal inquiry into the company’s recent disclosures regarding its variable annuity and variable life insurance businesses.

Management at the insurance and financial-services holding company said the SEC has requested information about the company’s decision to stop making and selling its proprietary variable annuity and life insurance products (and the anticipated or actual losses related to these products).

SEC Goes after Two Finance Executives

On Friday the SEC took further action against one finance executive and filed a civil action against another.

The regulatory agency ordered Barry Saffer, a former director of financial planning and analysis at supply-chain specialist Manugistics Group Inc., to disgorge $185,000 and barred him from further violations of the federal securities laws.

Back on July 2, Saffer pleaded guilty to 10 counts of securities fraud.

The SEC said Saffer used his position at Manugistics to obtain nonpublic information and traded in advance of company news announcements on a number of occasions. The illegal trades were made during the three-year period from January 1999 through March 2002.

In addition, the commission filed a related civil action against Saffer alleging that he violated the antifraud provisions of the federal securities laws by engaging in illegal insider trading.

Also last week, the SEC filed a civil action against Miriam Santos, former treasurer of the city of Chicago. Two of the city’s former top brokers, Peter Burns and Michael Hollendoner, were also named in the action.

The suit stems from for an alleged cash-for-business arrangement perpetrated when Santos was Chicago city treasurer.

The complaint claims that from 1995 to May 1999, Burns and Hollendoner made secret cash payments to Santos to obtain a share of the city’s lucrative investment business. Burns and Hollendoner allegedly paid thousands of dollars to Santos in return for getting securities business with the city. The SEC says Santos also cut off other brokers who refused to make campaign contributions she solicited.

The commission claims Burns and Hollendoner received thousands of dollars in compensation from city securities business that they otherwise would not have earned.

The complaint also alleges that treasurer Santos used the cash from Burns and Hollendoner for her own personal, political, and financial benefit. For example, the commission claims Santos used part of the cash to purchase furniture for the campaign office she used in her bid for attorney general.

The complaint also alleges that by engaging in a secret cash-for-business arrangement, Santos, Burns, and Hollendoner corrupted the normal competitive process by which the city allocated its investment business.

The complaint comes two years after Santos entered into a plea agreement with prosecutors. In that arrangement, she pleaded guilty to mail fraud, admitted fraud charges, and owned up to accepting $7,500 worth of furniture for her “Santos for Attorney General” campaign in 1998. The SEC said she was later sentenced to four months in prison and ordered to pay $21,000 in fines and restitution.

Santos later accepted a two-year suspension of her Illinois law license. That ought to teach her.

Shoring Up Pension Plans

The pension crisis has taken its toll on at least three more major companies. Last week:

  • Honeywell International Ltd. said it may contribute up to $900 million to its employee pension plans after assets dropped nearly 15 percent this year. “We presently anticipate that a substantial portion of any such contributions would consist of Honeywell stock,” the company noted in a regulatory filing.
  • SBC Communications Inc. said it would take a $1 billion to $2 billion write-off against next year’s earnings due to the declining value of pension investments and rising medical and prescription-drug costs. While pension fund assets have decreased in value, the company said it expects to meet yearly funding obligations as well as pension and postretirement benefit obligations.
  • Boise Cascade Corp. said it expects to contribute $80 million to $120 million to its pension plans in 2003.

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