SEC Investigating Willey for Insider Trading

Ex-Capital One CFO reportedly sold stock before company announced it was boosting reserves; share price tumbles on news. Elsewhere: PCAOB gets new director, Ralph Nader all over accountants, and Calpine to restate.


David M. Willey resigned as executive vice president and chief financial officer of Capital One Financial Corp. after he learned that the Securities and Exchange Commission is investigating him for illegal insider trading.

Capital One, the fifth-largest U.S. issuer of MasterCard and Visa cards, said Willey received a Wells notice indicating the SEC intends to bring a civil action against him. The company noted that no Wells notice was directed to Capital One or any other member of management.

The notice to Willey came after the SEC launched a formal investigation into the company’s announcement in July 2000 that regulators required Capital One to boost reserves by $247 million. The credit-card issuer’s stock price sank 39 percent after the company acknowledged the boosting of its reserves.

But two months earlier, Willey sold $3.2 million of Capital One stock. Willey sold 52,075 shares between May 9 and May 13 for between $62 and $62.22 each, while his wife sold 26,291 shares.

Capital One’s management said it is fully cooperating with the SEC’s investigation.

It added it has hired a search firm to find a replacement for Willey. Until then, Dave Lawson will assume the role of acting CFO.

Lawson joined Capital One in July 1998 when the company acquired Summit Acceptance Corp., a consumer auto-finance company, where he served as president and CEO. Since then, he has served as CEO of what today is Capital One’s $7 billion auto-finance subsidiary, Capital One Auto Finance.

Prior to Summit, Lawson served for 12 years as president of Western National Bancorporation, which is now a part of Bank of America. Before his career in banking, Lawson provided audit and consulting services for a number of large financial institutions as a partner at Arthur Andersen.

Yesterday Capital One said CEO Richard D. Fairbank and Lawson will certify the company’s 2002 financial statements, which will be filed by March 30.

Capital One has been attempting to rebuild its reputation with investors ever since the July 2000 announcement. Analysts said the resignation of Willey, who’s been with the company since 1989, won’t help. The share price of Capital One stock fell 9 percent yesterday.

In another insider-trading matter, the SEC said last week that it settled charges with former Watts Industries chairman and chief executive officer Timothy P. Home.

Under the deal, Home agreed to pay a civil penalty of $317,971, disgorge his trading profits of $317,971, and pay prejudgment interest of $94,442.

Home consented to the judgment without admitting or denying the allegations in the commission’s lawsuit.

Accounting Board Names New Director

The new Public Company Accounting Oversight Board (PCAOB) has named George H. Diacont director of registration and inspection, effective mid-March.

“I’m ecstatic that the board has given me this opportunity to be part of a process that is so important to the public interest and to the accounting profession,” he said in a statement.

Diacont is currently chief accountant (listing investigations) for Nasdaq. In that role, he provides advice and assistance in connection with investigations, reviews, and analyses; coordinates with the SEC; and interprets its requirements and the technical accounting and accounting requirements of the profession.

Diacont spent 24 years at the SEC, first as a staff member of the Division of Enforcement and the Office of the Chief Accountant, then as acting chief accountant in the Office of the Chief Accountant and as chief accountant in the Division of Enforcement.

He began his career as a staff auditor with Haskins & Sells.

Nader to Watch Accountants

It appears that Diacont will have someone looking over his shoulder at his new job at the PCAOB.

Yesterday it was announced that consumer advocate Ralph Nader has formed an oversight board to monitor the accounting monitors.

The Association for Integrity in Accounting (AIA), a new public-interest accounting group, has been formed by accounting professors and professionals with the help of Nader’s nonprofit group, Citizen Works.

The AIA will focus on four main areas: watching the watchdogs, restoring professional independence, assuring corporate accountability and disclosure, and redeeming accounting education.

“The mission of the Association for Integrity in Accounting is to provide an independent forum to present and advance positions on a wide range of critical accounting and auditing issues, standards, and regulations affecting the accountability and integrity of the profession and the public interest in maintaining trust and confidence in accounting,” said Linda Ruchala, founding member and an associate professor of accountancy at the University of Nebraska-Lincoln.

The association held its first meeting last weekend in Washington, D.C.

“As a watchdog of the watchdogs, the AIA will undertake a thorough evaluation of the current financial reporting system and keep a close eye on the activities of the Securities and Exchange Commission and other regulatory boards,” the group stated in its press release. “The AIA’s preliminary evaluation calls for abolishing the Financial Accounting Standards Board.”

The AIA said it will propose legislative and rule changes “to alleviate the conflicts of interest that arise from the way that CPAs are currently selected and paid.”

In the area of assuring corporate accountability and disclosure, the AIA will call for increased transparency on stock options and derivatives and for expanding the reporting of social and environmental liabilities. “The AIA will be a voice for openness and transparency in accounting,” it added.

To redeem education, the AIA said it will urge educators to help accounting students “think critically and independently instead of memorizing technical and often flawed rule-based approaches.”

The AIA added it would investigate and publicize the lessons of Enron and other accounting scandals so students, professionals, and the public can learn from these “corporate autopsies.”

Calpine Restates Results

Calpine Corp. said it will restate its results for the past three years because it incorrectly accounted for two sale-leaseback transactions.

Management at the energy company said it previously accounted for the transactions as operating leases. After consulting with its new auditor, Deloitte & Touche, however, the company has decided to record the sale-leasebacks as financing transactions

The company indicated the restatements won’t adversely affect the company’s cash flow or liquidity, or its outlook for 2003.

The sale-leaseback transactions have characteristics that prevent the use of operating lease treatment, the company explained. As a result, these two transactions will now be recorded as financings in Calpine’s consolidated financial statements.

Interestingly, the company’s management asserted that its former independent auditor, Arthur Andersen LLP, had agreed that the leases met the criteria for operating lease accounting under generally accepted accounting principles.

“Sale-leaseback accounting represents a very complex, technical and highly judgmental area of accounting,” stated Bob Kelly, executive vice president and chief financial officer, in a statement. “Calpine is currently evaluating amendments that could be made to the power contracts for these two projects, which would allow us to account for these transactions as operating leases going forward.”

Midsize Banks Embrace Outsourcing

Two-thirds of U.S. retail and commercial banks with assets of at least $3 billion outsource one or more business functions, according to a recent Accenture survey of bank executives.

Of the banks that outsource, 75 percent reported outsourcing credit-card processing and 40 percent reported outsourcing mortgage processing—two key service areas in which an outsourcer could potentially interact directly with a bank’s customers.

Many banks are also using an outsourcing strategy to improve back-office efficiency. For example, 55 percent of respondents that outsource also reported outsourcing some aspect of their human-resources function, and 55 percent reported outsourcing some aspect of their information technology.

One objective of the survey was to gauge banks’ attitudes toward outsourcing finance and accounting functions. Nearly half (44 percent) of the respondents surveyed said their banks outsource some aspect of accounting, including elements of tax accounting, financial reconciliation, consolidation, monthly/quarterly close, fixed-asset accounting, accounts payable, accounts receivable, and management or legal-entity reporting.

Fewer than one-third (30 percent) of banks surveyed reported measuring or tracking the efficiency of their finance and accounting operations.

The metrics used to track these operations often include cost per transaction (invoice, check, and so on), number of transactions per accountant, and error rates, among others.

“The finance and accounting function could be the next cost-reduction frontier for many banks,” said John O’Connor, a partner in Accenture’s financial-services operating group, “and outsourcing is an excellent vehicle to help banks rationalize redundancies, improve automation, exploit low-cost location processing, and implement a variable cost structure within their finance and accounting functions.”

Eighty-five percent of the banks that outsource reported they are either “satisfied” or “very satisfied” with their outsourcing partners, with the average satisfaction rating of all banks surveyed being 4.4 on a 5-point scale, where “5” is “very satisfied,” according to Accenture.

Two-thirds of executives who reported that their banks outsource said they expect outsourcing activity at the banks to remain at current levels during the next 12 months, while 20 percent said they expect to increase the level of outsourcing during that time.

Of the one-third (33 percent) of banks surveyed that reported not outsourcing any internal or external functions, 50 percent said they don’t outsource because they have sufficient staff to manage all functions internally, and 40 percent said they don’t outsource because they don’t believe it will be cost-effective.

Thirty percent of the banks that reported not outsourcing also said they fear a loss of control over key business functions.

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