EU Says PU to Sarbanes-Oxley Plan

Finance ministers on the continent call Sarbanes-Oxley mandate to register unacceptable; threaten retaliation. Plus: Medieval remedies for securities fraud? And: Ex-McKesson CEO charges.

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U.S. policies—and policymakers—seem to be in the doghouse these days.

First, new findings by the Pew Global Attitudes Project say that America’s image deteriorated precipitously during the month of May, mostly because of the way the government is handling postwar issues in Iraq. Now, it seems as though the souring of public opinion on the United States is extending into the accounting sector.

Finance ministers in the European Union are outraged about new trans-Atlantic directives coming from Sarbanes-Oxley Act, and are taking aim at the Public Company Accounting Oversight Board (PCAOB), one of the groups charged with implementing the new law. As a result, this week the EU ministers demanded a “full exemption” from the rules. This according to a report from international news service AFP.

The U.S. Sarbanes Oxley Act requires that public accounting firms register with the newly created accounting industry oversight board. EU officials aren’t happy that accounting firms have to register with a U.S. regulatory entity.

In a letter sent to SEC chairman William Donaldson and U.S. Treasury Secretary John Snow after the PCAOB finalized its registration rules in April, EU Internal Market commissioner Frits Bolkstein threatened retaliation if the PCAOB rules were not rescinded.

On behalf of the 15 EU member countries, Bolkstein condemned the PCAOB’s registration process, calling it “unacceptable given the major conflicts of law that may ensue.”

He encouraged the SEC, which oversees the PCAOB, to redraft the entire plan and negotiate an alternative pact with the EU that recognizes the audit controls of all parties.

According to the current PCAOB rules, European firms will have to register with the board by May 2004. U.S. firms are required to register by October. The underlying threat: unregistered accounting firms would be banned from performing audit work for U.S. issuers.

AFP estimates that 280 EU companies either have a dual listing in the United States or are a subsidiary of an American-based public company.

If the EU’s call to redraft is not met, Bolkstein noted in the letter that U.S.-based accounting firms operating in the EU would be forced to register. And not just with the EU, mind you, but with all 15 member states, as well as the 10 countries joining the EU next May.

(Editor’s note: The advent of the PCAOB, along with the recent spate of corporate scandals, has put accounting firms squarely in the regulatory hot seat. The upshot? External audits may never be the same again. To find out how audits will change in the next few years, read The New Rules of Engagement,” a CFO.com exclusive.)

Shelf Lives

Lately vendor allowances seem to be attracting federal investigators like moths to a flame. The allowances, also called vendor rebates, already are the subject of Department of Justice and SEC investigations into accounting practices at Dutch supermarket operator Ahold NV.

What’s more, officials at two other grocery-chain operators—The Kroger Co. and Albertson’s Inc.—announced this week that they were questioned by the SEC earlier in the year about how their companies book vendor allowances, reports the Financial Times.

Vendor allowances are volume rebates from manufacturers that are shelled out to motivate distributors to give certain products prime shelf space at retail outlets. Executives at Ahold subsidiary US Foodservice have been accused of booking these allowances outside of generally accepted accounting principles to inflate revenues.

Executives at Cincinnati-based Kroger, which operates 2,500 supermarkets in 32 states, say they were among many major retailers that adopted a new accounting treatment for vendor allowances starting in January. The new treatment did not require Kroger to change SEC filings, however, and management does not anticipate any changes to net earnings based on the new accounting practices.

The SEC was interested in vendor allowances that appeared in Kroger’s 2001 10-K, as well as those represented in the company’s 10-Qs for the second and third quarters of 2002.

Executives at Boise-based Albertson’s also recently received a letter from the SEC, notifying them of “an informal inquiry concerning how certain retailers treat allowances they received from their vendors.” The management of both grocery chains are cooperating with investigators.

Former McKesson Chairman, CFO Charged

After four years of investigation, Charles M. McCall, the former chairman of McKesson HBOC, was charged with seven counts of financial reporting fraud by a federal grand jury in San Francisco. In addition, Jay Gilbertson, the ex-CFO of HBO & Co. (HBOC), the company that eventually merged with McKesson, entered a plea of guilty on a count of conspiracy to commit securities fraud, says a report from the Associated Press.

According to SEC documents, McCall and Gilbertson participated in a long-running fraudulent scheme to artificially inflate revenue and net income at HBOC, and later McKesson HBOC, to drive up the company’s stock price. McKesson HBOC (since renamed McKesson Corp.) is a Fortune 20 vendor of health-care software. The company was formed by a January 1999 merger of San Francisco-based McKesson Corp. and Atlanta-based HBOC.

The scheme, which was exposed in 1999 and prompted McCall’s firing, bilked shareholders out of $9 billion.

Each of McCall’s seven counts carries a penalty of 5 to 10 years, as well as fines of up to $1 million. According to the AP, prosecutors will likely target some of McCall’s past gains as reparation for his misdeeds.

In 1997 and 1999, the then-CEO exercised McKesson stock options worth $53.7 million. Published reports confirm that McCall left the country on Tuesday—the day the grand jury handed up the charges—on a long-planned vacation. He is expected to return immediately to enter a not guilty plea.

Yesterday former finance chief Gilbertson agreed to forfeit McKesson shares worth $5.3 million, and pay a $1 million SEC fine. He faces a possible 15 years in prison for his part in the scam.

Two other former executives pleaded guilty and agreed to cooperate with prosecutors. Dominick DeRosa, once HBOC’s senior vice president for sales, pleaded guilty to aiding and abetting securities fraud. Meanwhile, Timothy Heyerdahl, the company’s former senior vice president for finance, pleaded guilty to insider trading.

However, Jay Lapine, HBOC’s former general counsel, who was indicted on securities fraud charges, pleaded not guilty.

Ciminal charges were also lodged against Albert Bergonzi, HBOC’s former president and a onetime executive vice president at McKesson. He is accused of accounting improprieties. He maintains his innocence. Bergonzi allegedly participated in the accounting misdeeds from December 1997 through late April 1999.

In all, 11 former McKesson HBOC executives have been charged in relation to the scandal.

If She Drowns, She’s Innocent

Here’s something to mull over when you catch the next episode of “From Martha’s Kitchen.” The prosecution techniques used by the SEC to indict domestic doyenne Martha Stewart are positively medieval. No, really.

The New York Times reports that the SEC is using an updated version of Morton’s Fork to pursue celebrity executives who run afoul of securities laws. Named after King Henry VII’s chancellor John Morton, the “fork” was a tax-assessment system that never failed to deliver a rate increase.

It worked like this: Morton would join noblemen for a home-cooked meal. If the meal was inexpensive, Morton reasoned that the host was saving money and could afford a tax increase. If it was extravagant, the taxpayer could obviously afford an increase.

Similarly, the SEC indictments focus not only on evidence of a crime but also on evidence that a suspect is covering up the crime.

For instance, says the report, Martha Stewart was not indicted for insider trading, but rather for obstructing an investigation into whether she sold stock based on inside information. Likewise, former technology investment banker Frank Quattrone was accused only of forwarding an E-mail message to subordinates about deleting potential damaging E-mail evidence. And, as you recall, managers at now-defunct Arthur Andersen were charged with destroying Enron documents—not with partaking in a scheme to hide the company’s liabilities from investors.

Short Takes

  • Call it cash management for high rollers. A group of eight J.P. Morgan Chase insiders have netted the company $100 million this year by using corporate funds to place some risky currency and interest rate bets. According to the Wall Street Journal, which cited an unnamed J.P. Morgan executive, the group created an internal hedge fund for the bank. That fund accounted for about 7 percent of the bank’s total profits for the first quarter. J.P. Morgan CFO Dina Dublon told the Journal that the high returns were not a result of greater risk-taking, but rather of “better market conditions.”
  • Wayne Pace, CFO of AOL Time Warner Inc., told investors this week that the media conglomerate was on track to meet 2003 financial targets—but company executives may reassess that outlook. What’s wrong now? Strangely, nothing. Pace said that recent positive developments, like the release of box-office hit Matrix Reloaded, may bring a positive rejiggering, reports Reuters. Pace still expects single-digit revenue growth in 2003 (the company reported turnover of $41 billion last year), with EBITDA growth in the low— to mid—single digits for 2003.
  • The Federal Communications Commission lifted ownership restrictions for media companies earlier this week. Now the New York Times reports that Senate Democrats and Republicans are bucking to overturn the three-day-old deregulation effort (apparently House members are more sympathetic to the FCC’s free-market view).

Certainly lawmakers in the Senate have the public support to nix the FCC’s vote to deregulate. The commission’s decision has touched off a veritable firestorm of protest, and from some strange political bedfellows. Both the National Organization for Women and the National Rifle Association, for instance, oppose the FCC’s decision. Washington watchers say public outrage over the decision could have Congress rethinking the FCC’s move. Incidentally, FCC chairman Michael Powell is the son of Secretary of State Colin Powell.

  • Magazine publisher Primedia Inc. promoted treasurer Matthew A. Flynn, 45, to the additional role of CFO. Flynn succeeds Lawrence Rutkowski, who resigned in “a decision that was made mutually with the company.” Also, Robert J. Sforzo, 56, was named to the newly created position of chief accounting officer. He has been corporate controller for the publisher of Seventeen and Soap Opera Digest since January 2000.
  • Nara Bank NA, a wholly owned subsidiary of Nara Bancorp Inc., appointed Timothy T. Chang CFO. Chang is the former treasurer of the Los Angeles—based bank. Prior to joining Nara, he was an auditor for Deloitte & Touche and Ernst & Young, specializing in the banking industry.

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