Two Telecom Employees Override Internal Controls

Impact is ''not material,'' except perhaps on the share price. Also: Despite FASB delay, company consolidates two entities; time for tech to start ''driving growth''?; fewer ''fallen angels''; Oracle plans for PeopleSoft's annual meeting; and more.

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AT&T said it understated its expenses by $125 million in 2001 and 2002 because two employees circumvented its internal controls process.

The telecom giant said that since the impact to prior years’ annual financial statements was not material, it recorded an additional expense of $125 million ($77 million after tax) in the third quarter to reflect the proper estimate of the liability. The expense would have decreased earnings from continuing operations for 2001 by $32 million and in 2002 by $45 million.

The company announced that it discovered the errors after a review was conducted by outside legal counsel, under the direction of the audit committee. This review found that “one lower-level and one mid-level management employee” circumvented the internal controls process, causing the company to understate access and connection expenses by $125 million in 2001 and 2002.

AT&T said that the costs had at first been underestimated by accident, reported the Associated Press, and that the two employees tried to protect themselves by covering up the error. The company fired the employees and two supervisors, added the AP.

AT&T chief financial officer Thomas Horton, in an interview with Reuters, declined to comment on whether the conduct amounted to fraud, or whether AT&T would pursue legal action against the former workers.

AT&T’s share price fell Tuesday by 5 percent.

Despite FASB Delay, AT&T Consolidates Two Entities

In a related matter, AT&T said that it adopted Financial Accounting Standards Board Interpretation No. 46 as of July 1. This would have been at the beginning of the quarter that FASB initially set for implementation, and one quarter before the board’s recently revised start date.

FASB issued FIN 46 in January to prevent companies from using off-balance-sheet partnerships or other special-purpose entities to hide debt and inflate profits, as Enron is alleged to have done in particularly aggressive fashion.

AT&T said it consolidated two entities from which AT&T leases buildings. This consolidation resulted in the addition of $433 million of assets (principally the leased properties) and $477 million of liabilities (debt secured by the properties).

It also resulted in a charge of $27 million, net of income taxes, as the cumulative effect of an accounting change. In addition, the adoption of the accounting change resulted in the increase of net debt by $500 million, according to AT&T.

Time for Tech to Start ”Driving Growth,” Says Gartner

Gartner Inc. says 2004 will be the year of the technology recovery.

The consulting firm advised its corporate and government clients to spend more next year on wireless networks, Web services, and technologies that help businesses grow, not just save costs, according to Reuters.

“Gartner is telling you a big turn is coming,” Michael Fleisher, the firm’s chairman and chief executive, said in a speech to 6,000 corporate technology purchasing decision makers attending the Gartner Symposium conference in Orlando, Florida. “2004 will be the year that companies make the turn from protecting profitability to driving growth.” (According to CFO IT’s second annual survey, senior finance executives are bullish on the value of IT and prepared to raise budgets accordingly.)

He added that spending will accelerate modestly in 2005 and 2006, but there will be sweeping new technology changes.

“We believe that ’06 will look as different when compared with ’03 as ’03 looks when compared with ’99,” Fleisher reportedly said.

Despite his optimistic pronouncements, he counseled companies to continue to cut expenses by switching to lower-cost PC hardware and by outsourcing software and services to lower-cost, often overseas, technology suppliers, according to the wire service’s account.

In fact, Gartner estimates that 25 percent of all technology jobs will be centered in low-cost, developing-world countries such as India by 2008. (For more, see CFO magazine’s October story “The China Syndrome.”)

Overall, Gartner forecasts global technology spending to grow 5.4 percent to $2.40 trillion in 2004, up from the $2.27 trillion expected to be spent in 2003, according to the wire service.

The consultancy also predicts yearly growth of around 5 percent in each subsequent year through 2007, to $2.77 trillion. However, keep in mind that this is just about half the 9 percent to 10 percent growth rates seen in the late 1990s.

The biggest gains are expected in computer hardware, which should grow 4.4 percent to $355 billion in 2004 from flat growth in 2003 and negative growth of 2.2 percent in 2002.

Growth in software sales is expected to climb to 7 percent, from 2.2 percent this year, and to average 8 percent growth through 2007.

Gartner said most corporate and government spending will focus on keeping existing systems running or figuring out how to save money by either running the systems themselves or outsourcing.

Fleisher reportedly said new technology purchases over the next two to three years will center on four themes:

  • A rapid shift to secure, high-speed wireless networks.
  • An increasing shift to a more mobile workforce, as buying switches to notebook PCs from desktop computers and more organizations adopt wireless email and other ways of staying connected on the road.
  • As more workers begin to enjoy constant network connections, demand for real-time access to company information in the form of Web-delivered services.
  • Due to all of the above, growing numbers of computer servers to capture all the new data created on these networks.

Fewer ”Fallen Angels” Is Another Sign of Credit Recovery

The credit market is apparently continuing on the road to recovery.

The number of “fallen angels” — issuers downgraded to junk territory from investment grade — continues to decline. Standard & Poor’s says it has counted 47 fallen angels so far this year, compared with 65 in the corresponding period a year ago. The number of entities that could potentially become fallen angels fell to 46 worldwide, compared with a revised count of 49 in August.

Prior to the current deceleration, the number of fallen angels had increased each year since 1996, peaking in 2002 amid widespread credit deterioration combined with anxiety about corporate scandals and accounting impropriety, noted S&P.

Worldwide, the capital-goods sector and the media-and-entertainment sector have each generated six fallen angels this year. The high-technology and insurance sectors each have seven issuers that appear vulnerable to acquiring fallen-angels status.

Short Takes

  • Oracle Corp. plans to put up its own slate of potential directors at PeopleSoft’s upcoming annual meeting, according to Reuters. “You need to understand that although they have a poison pill, they do have an election of their board that will come up. We will have an alternative slate for their board,” Safra Catz, an Oracle executive vice president and a member of the office of the chief executive, reportedly told reporters at the Oracle World conference in Paris.
  • High executive pay is becoming a big issue among investors and other U.S. citizens, said William McDonough, chairman of the Public Company Accounting Oversight Board, at a National Association of Corporate Directors conference in Washington. “I know so from meeting with members of Congress who tell me that the mail from their constituents is heavy, and it is hot,” he said, according to Bloomberg. “Americans are telling their elected representatives that they are angry, and the thing they are angriest about is executive compensation.”

“You should think long and hard about the compensation of the executives who head the corporation you are sworn to protect,” McDonough reportedly added. “If the pay should be rightfully reduced, what is the worst that can happen? An insulted CEO resigns or takes early retirement.”

  • Video game maker THQ Inc. said Fred Gysi plans to step down as senior vice president and chief financial officer. He will remain in this role during the search for his replacement.
  • Merrill Lynch & Co. collected $539 million in fees in the third quarter from underwriting stocks and bonds and advising on acquisitions, according to consultant Freeman & Co. Goldman, Sachs collected $526 million in fees; Citigroup, $525 million.
  • The Coface Group, which is engaged in export credit insurance and commercial risk management, upgraded its ratings for the United States, the Czech Republic, and Ukraine. The Netherlands and Bahrain were downgraded. Germany, Jordan, Poland, and Spain were removed from the negative watch-list, while Argentina, Chile, Slovakia, and Turkey were placed on the positive watch-list.
  • Moody’s Investors Service raised the ratings of railroad operator Union Pacific Corp., citing a reduction in the company’s debt following its acquisition of Southern Pacific and strong free cash flow.
  • DaimlerChrysler AG announced that it took an impairment charge of $2.28 billion in the third quarter, related to the company’s investment in The European Aeronautic Defence and Space Co. In addition, Standard & Poor’s reduced its long-term credit rating on the carmaker to BBB from BBB+ with a negative outlook, saying the move “reflects concerns about the increasingly clouded prospects of the Chrysler Group amid intensifying competition in the North American auto market.”

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