RX for Fraud: More SEC Checkups

SEC gears up to crack down; more spot-checks coming. Plus: Workers putting off retiring, exchanges put off by 'financial expert.' And: ex-GE Cap finance chief gets 15 months, while Williams and Cendant get new CFOs.


The Securities and Exchange Commission is looking to increase the frequency of spot checks it conducts on publicly-traded companies. Currently, the SEC performs spot-checks on corporate filers once every three to five years. Under the new plan, the commission would conduct the checks every three years.

The modified schedule will increase the number of SEC reviews to 3,500 a year. That’s a substantial jump from the 2,900 company checks the commission does now.

To handle the extra workload, the securities regulatory agency is doubling the number of accountants in the Corporate Finance Division, according to a report in The Wall Street Journal. About 300 accountants and attorneys work there now, plowing through annual and quarterly filings, initial public offerings, proxy statements, and the like.

So what’s behind the increased audit frequency? Sarbanes-Oxley, what else. And while Congress set the standard with passage of that legislation, it left the intensity of the reviews up to the SEC’s discretion.

Reportedly, SEC staffers claim limited reviews make the most sense, noting that a full review of annual reports every three years isn’t practical. Such an exhaustive review usually takes a week of work by a lawyer-accountant team, followed by more analysis by senior SEC managers.

In any case, the scope of the new reviews still haven’t been determined. And Corporate Finance Division Head Alan Beller believes that full reviews — and even the more narrow ones that focus on a single issue like revenue recognition — will count as reviews under the Sarbanes-Oxley requirements.

Before passage of Sarbox, the SEC followed a self-imposed regimen of auditing company filings, with reviews slated every three to five years. According to The Journal, however, the schedule often lapsed.

In fact, Enron Corp., the company partly responsible for the increased scrutiny, had not undergone an SEC review for at least three years before the energy trader went bankrupt.

A Penn State/University of Alabama study confirms the uneven review process. The research found that the SEC did not review 25 percent of publicly traded companies between 1987 and 1991. However, 23 percent of the companies were analyzed twice; 16 percent three times; and 3 percent were reviewed every year.

Michael Clampitt, an SEC attorney quoted in The Journal, compared the new process to the high-profile SEC review of Fortune 500 companies. That program, said Clampitt, was a “public-relations ploy” — designed to hype reviews which sometimes only took a few hours to complete.

Workers Fret About Retirement

Corporate attrition plans, aimed at cutting workforce costs, may run into a bit of trouble over the next few years. Why? A new study says more workers are planning to postpone their retirements.

Indeed, 24 percent of workers 45 and older expect to postpone riding off into the sunset. That figure is a nine percentage-point jump from last year’s tally.

In addition, 16 percent of the workers contend they are not at all confident that they’ll have enough money saved for retirement. Last year, only 10 percent felt that way.

So why are so many employees saying they’ll choose cubicles over cribbage? Not hard to figure: workers in the survey said they’re worried that stock market losses and general economic woes will deplete their nest eggs.

The survey, the 13th annual Retirement Confidence Survey (RCS), was released this week by the Employee Benefit Research Institute, American Savings Education Council (ASEC), and market research firm Mathew Greenwald & Associates.

Surprisingly, the majority of the 1,000 respondents (66 percent) claim they feel either very, or somewhat, confident about having enough money to live comfortably in retirement.

That cheery outlook, however, does not jibe with the survey’s measure of rising anxiety levels among older employees.

But the authors of the poll offer three explanations for that apparent contradiction. First off, many workers don’t know how much money it takes to live comfortably in retirement. Second, a sizeable proportion of workers say they have made lifestyle changes to address economic uncertainty. And finally, some workers have not been hurt by the bear market because they’re not heavily invested in stocks.

How Do You Spell Financial Expert?

Regulators have hit a slight glitch regarding audit committees. Apparently, the Securities and Exchange Commission, the Nasdaq Stock Market, and the New York Stock Exchange, still can’t agree on a definition for “financial expert.”

That’s a problem. According to a report from Dow Jones Newswires, confusion over audit committee composition could send a convoluted message to the marketplace.

Officials at Nasdaq and the NYSE require audit committees at listed companies to employ at least one financial expert. But the definition used by the two exchanges is less onerous than the one now being required by the SEC. And officials at the two major boards thought changing their existing descriptions to fit the government’s more rigid designation would, in fact, create confusion.

But the SEC’s not likely to back off its stringent definition of financial expert — particularly since that definition was mandated by the Sarbanes-Oxley Act. Under SEC rules, a company’s management must disclose to investors whether a financial expert sits on the company’s audit committee. If the committee doesn’t have someone that matches the SEC definition, management must issue an explanation to investors. And few corporates want to risk such an admission.

The SEC rule is unyielding: a financial expert must understand financial statements, GAAP, internal controls and procedures for financial reporting, and audit committee functions. In addition, that person must be able to assess the application of accounting principles regarding accounting estimates, accruals and reserves, and have experience preparing, analyzing or evaluating financial statements that are comparable (in accounting complexity) to the statements of the company on whose board they sit.

The NYSE, on the other hand, wants its audit committee members to have “accounting or related financial management expertise.” Nasdaq calls for past experience in finance or accounting or a professional accounting certification.

Short Takes

  • Williams Cos. hired Donald R. Chappel, 51, as CFO. He succeeds Jack McCarthy, who retired in December. Most recently, Chappel was CEO of a Chicago-based development business he founded. Twice during the late 1990s, Chappel was CFO at Waste Management Inc.; before and after that company’s 1998 merger with USA Waste Services. With Chappel’s hiring, interim CFO Gary Belitz will resume his duties as controller and chief accounting officer.
  • Former DreamWorks SKG COO Ronald Nelson is appointed to the Cendant board, immediately, and will take over as finance chief of the travel and real-estate company on May 12. Before signing on with DreamWorks in 1994, Nelson was CFO of Paramount Communications. Nelson replaces Kevin Sheehan, who will focus on his role as chairman and CEO of Cendant’s vehicle services division.
  • A federal judge postponed the tax-evasion trial of former Tyco International Ltd. CFO Mark Swartz, which was slated to begin on April 15 in Concord, N.H. The new trial is set for July 8. Swartz allegedly failed to report a $12.5 million Tyco bonus in 1999, thereby sidestepping a $5 million federal tax bill. Swartz’s attorneys were trying to reschedule the April court appearance for late November. That would have allowed Swartz’s lawyers to concentrate on his upcoming Sept. 29 trial in New York City, where the onetime Tyco finance chief faces criminal charges, reports Reuters.
  • Under pressure from the Securities and Exchange Commission, officials at the Nasdaq stock market have decided to split the job of chairman and CEO. This, according to The New York Times. The changing of the guard takes place on May 12, when current Nasdaq chairman and CEO Hardwick Simmons retires. Robert Greifeld will be named CEO. Currently, Greifeld is vice president at Sungard Data Systems, which owns Nasdaq competitor Brut. The chairman slot will be filled by H. Furlong Baldwin, an outside director. Baldwin believes the separation puts Nasdaq in a “leadership role,” but he says the exchange won’t push companies that trade stock on its system to make the split.
  • Former GE Capital Vice President of Finance Anthony Chrysikos was sentenced to 15 months in jail for insider trading. In addition, he was fined $4,000 and sentenced to three years of supervised release. Chrysikos pleaded guilty to securities fraud violations for a July 2001 incident in which the finance chief tipped off his Kung-Fu instructor, about a merger between GE Capital Corp. and Heller Financial Inc. Acting on the tip before the merger was announced, the instructor made a $157,259 profit off of his $11,000 investment in Heller — and apparently shared the proceeds with Chrysikos.

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