When David FitzPatrick left United Technologies in September to take over the CFO job at Tyco International, some observers thought he was plain crazy. After all, they asked, why would anyone would leave a plum job at a well-respected, blue-chip business to become chief financial officer at a troubled, scandal-plagued conglomerate?
The answer may be a little clearer now.
FitzPatrick, who jumped to Tyco after serving as CFO at UT since 1998, was reportedly given a total compensation package worth nearly $22 million from his new employer.
The pay package included a signing bonus estimated by Reuters to be worth $13.1 million. According to a Tyco government filing earlier this week, FitzPatrick received $500,000 of that amount in cash. He also was awarded 1.15 million stock options and 90,000 deferred stock units, all with strike prices of $16.24 a share. The value of those shares? According to research firm Equilar Inc., $12.6 million.
FitzPatrick also received a base salary of $750,000, as well as 610,000 options grants and deferred stock units with a strike price of $16.24 a share. Total value of these noncash payments: $7.6 million, according to Reuters (citing Equilar’s calculations).
Add it all up and you have a total package worth $21.45 million.
That’s a whole lot more than FitzPatrick was making at United Technologies. In his last pay package at UT, he received a salary and bonus of $958,333, plus 265,000 options with an estimated value of $7.13 million (according to UT’s proxy). Total value: just south of $8 million.
Then again, FitzPatrick appears to be facing a tougher job at Tyco than at UT. Moreover, his $22 million haul is substantially less than what his predecessor at Tyco made. According to CFO.com’s 2001 compensation survey, former Tyco CFO Mark Swartz made nearly $32 million in direct compensation in 2001. The year before that, Swartz pulled in almost $50 million.
Still, if the $22 million figure is accurate, it would be enough to vault FitzPatrick into the ranks of the highest-paid CFOs in the United States. In the 2001 compensation survey, for instance, a $22 million pay package would have put FitzPatrick fourth on the list—just two places behind Swartz.
AICPA: No Doc Holiday
The American Institute of Certified Public Accountants (AICPA) said it backs the Securities and Exchange Commission’s proposed rule for retaining records related to audits and reviews of financial statements.
“However, we believe that the rule could be clarified and improved in several respects,” said the AICPA in a statement.
For example, the AICPA said it is concerned that the SEC’s broad interpretation of “other documents” might inhibit interaction among audit-firm personnel. Why? For starters, the CPA group believes auditors would be reluctant to place preliminary conclusions, opinions, or analyses in writing for fear that they would have to hold on to those documents.
“We believe this would not be in the public’s interest because this would adversely affect audit quality,” stated the AICPA.
The trade association also said it is concerned that a tendency to communicate less in writing may result in less-complete communications and greater potential for misunderstanding of facts. Further, the AICPA asserted that the proposal may undermine reviews by supervisory personnel, concurring partner reviewers, and firm experts.
As a result, the AICPA recommended that the definition of “other documents” be more clearly described. The trade association even offered up its own definition: “Documentation of significant differences in professional judgment arising during the audit on issues that are material to the issuer’s financial statements or to the auditor’s final conclusions regarding the audit or review.”
The association also recommended that the SEC modify the provision of the proposed rule that is designed to ensure the preservation of documents that offer differing professional judgments and views on significant matters (both within the accounting firm and between auditor and client).
The AICPA said it generally agreed with the proposed rule that would require records to be retained whether the conclusions, opinions, analyses, or financial data in the records would support or “cast doubt” on the final conclusions reached by the auditor.
But the association expressed concern that the term “cast doubt” may be too broad and may be misunderstood by auditors.
Instead, the AICPA recommended that the rule be written to require the retention of documentation when the conclusions, opinions, analyses, or financial data in the records support the final conclusions reached by the auditor, or it documents significant differences of professional judgment arising during the engagement and the related issues are material to the issuer’s financial statements or to the auditor’s final conclusions regarding the audit or review.
Of course, the word “significant” would seem to leave auditors a lot of leeway as to which records they must keep.
The comment period for the SEC proposal ended December 27.
SEC to Vote on New Audit-Committee Rules
Next week the SEC plans to vote on a number of proposals regarding audit committees mandated by the Sarbanes-Oxley legislation enacted July 30.
For example, the SEC will consider whether to issue proposals that would require stock exchanges and securities associations to prohibit the listing of any security of an issuer that is not in compliance with the audit-committee requirements of the new law.
These requirements cover the independence of audit-committee members, as well as the audit committee’s responsibility to select and oversee an issuer’s independent accountant. They also include new rules governing the authority of the audit committee to engage advisers, along with funding for an independent auditor and any outside advisers engaged by the audit committee.
According to Sarbanes-Oxley, “the auditing process may be compromised when auditors view their main responsibility as serving the company’s management rather than its full board of directors or its audit committee.”
The SEC is required to adopt listing rules for companies that fail to comply with Section 301 (Public Company Audit Committee) of Sarbanes-Oxley within 270 days of its becoming law.
Under the law, each member of a company’s audit committee must also be a member of the board of directors. In addition, a member of an audit committee may not accept any consulting, advisory, or other compensatory fee from the company or be an affiliated person of the company or a subsidiary.
The law also requires audit committees to establish procedures for handling complaints received by the company regarding accounting, internal accounting controls, or auditing matters. Moreover, the law establishes procedures for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters.
Several accounting scandals have been triggered by letters sent by employees to employers or regulatory bodies. Last January, for example, Kmart found itself engulfed in controversy after the troubled retailer announced its board had received a letter questioning its bookkeeping practices. The letter, which was also sent to Kmart’s auditor, PricewaterhouseCoopers, and the SEC, reportedly came from employees of the company.
Will FASB Require Expensing of Stock Options?
The Financial Accounting Standards Board (FASB) issued guidelines that require more prominent and more frequent disclosures about the effects of stock-based compensation.
In addition, the board, which sets U.S. accounting standards, said it plans to make a decision in the latter part of the first quarter of 2003 about whether it will reconsider the issue of expensing stock options.
“As part of that process, the board may revisit its 1995 decision permitting companies to disclose the pro forma effects of the fair value based method rather than requiring all companies to recognize the fair value of employee stock options as an expense in the income statement,” said FASB in a statement. “[Currently], companies may either recognize expenses on a fair value based method in the income statement or disclose the pro forma effects of that method in the footnotes to the financial statements.”
“This is just a prelude to mandatory expensing of options,” Robert Willens, an accounting analyst at Lehman Brothers Holdings Inc., told Bloomberg. “I would expect that we would have that in place by the end of 2003.”
In the past, companies that adopted the preferable, fair value—based method were required to apply that method prospectively for new stock-option awards, acknowledged FASB. This contributed to a “ramp-up” effect on stock-based compensation expense in the first few years following adoption, which concerned companies and investors because of the lack of consistency in reported results, it added.
To address that concern, FASB issued Statement 148, which provides two added methods of transition that reflect a company’s full complement of stock-based compensation expense immediately upon adoption, thereby eliminating the ramp-up effect.
Statement 148 is also an attempt to improve disclosure about the effects of using the fair value—based method of accounting for stock-based compensation for all companies—regardless of the accounting method used. FASB noted that the statement requires that such data be presented more prominently and in a more user-friendly format in the footnotes to the financial statements.
In addition, the statement requires that this information be included in interim (as well as annual) financial statements. In the past, companies were required to make pro forma disclosures only in 10-Ks.
The transition guidance and annual disclosure provisions found in Statement 148 are effective for fiscal years ending after December 15, 2002.
Ranking the Bond Underwriters
Despite roughly 40-year lows in interest rates, 2002 was not a great year for corporate bond underwriting. Why? Because companies were busy trying to pare debt—not increase it—and investors worried about credit quality, defaults, accounting scandals, and the lousy economy.
In fact, investment banks underwrote $2.7 trillion in bonds last year, down 19 percent from 2001, according to Bloomberg.
Few bankers predict a rebound this year. “I expect volumes to be pretty similar in 2003,” Hope Pascucci, global head of syndicate at Deutsche Bank AG, told the wire service.
Citigroup Inc.’s Salomon Smith Barney was the top underwriter for the second straight year, managing $253 billion of corporate, agency, and government sales, according to Bloomberg.
J.P. Morgan Chase & Co. and Deutsche Bank AG came in second and third on the list.
Here, then, are the top 10 underwriters of corporate and agency debt in 2002, and their market share, according to Bloomberg’s calculations:
Salomon Smith Barney, 9.4 percent
J.P. Morgan Chase & Co., 7.5 percent
Deutsche Bank AG, 6.5 percent
Morgan Stanley, 6.0 percent
Merrill Lynch & Co., 5.9 percent
Credit Suisse First Boston, 5.6 percent
Lehman Brothers, 5.4 percent
UBS Warburg, 4.9 percent
Goldman Sachs & Co., 4.8 percent
Barclays Capital, 3.1 percent