The SEC Plays Good Cop

The SEC has a change of heart; Lucent's massive NOL carryback; the problem with whistle-blower hotlines; why Florida hurricanes won't affect insurance rates; say good-bye to roomy office suites; who's really listening to your conference calls; and more.


Perhaps there is a kinder, gentler side to the Securities and Exchange Commission after all. With companies straining to meet the requirements for documented and audited internal controls by the end of the year, the SEC has apparently taken pity. While it is holding to its schedule for compliance with Section 404 of Sarbanes-Oxley, it is expected to delay the deadline for a second project — accelerated filing — by a year.

The September proposal, which is expected to pass this month, would give companies another year to begin filing annual reports in 60 days and quarterly reports in 35 (as opposed to the current 75- and 40-day requirements, respectively). The earlier deadlines were supposed to go into effect as early as December 15 for many public companies.

The SEC says its change of heart, prompted by a joint letter from the Big Four accounting firms to SEC chief accountant Donald Nicolaisen, is a recognition that public companies are already dealing with a raft of new compliance issues, especially the Section 404 regulations. In a statement, the commission said it wants to make sure companies “implement the internal-control requirements with the care and attention we believe is desirable.”

It’s not the first time Nicolaisen has shown sympathy for firms struggling to meet Section 404 requirements. In June, he reportedly told Dow Jones that he might favor postponing the implementation of the Financial Accounting Standards Board’s stock-option expensing rule until 2006. It’s currently expected to go into effect in June 2005.

Doug Pierce, assistant controller at Denver-based Red Robin Gourmet Burgers Inc., was one of several finance executives who wrote a comment letter to the SEC suggesting that it was 404 compliance that should be delayed instead, noting that shaving 15 days off reporting deadlines offered little help. “404 is probably the most granular piece of accounting literature I’ve ever seen,” says Pierce, who says it has more than doubled his workload. “I wish they could spend a day in our shoes.”

Several small-company CFOs took the opportunity to argue against being included in the “accelerated filer” group. “The larger issue to me is the ridiculously low threshold of $75 million in public market cap,” wrote Robert B. Fowles, CFO of Spectrum Organic Products Inc. “All this does is create additional opportunity for errors and shoddy MD&A reporting due to the time crunch.”

Elaine Meyers, CFO of Franklin Financial Services Corp., also takes issue with the $75 million threshold: “[It] puts undue pressure on small companies with limited personnel resources.” —Tim Reason

Hello There

It’s no secret that American companies outsource call centers to lower-cost locales. But customers often have no idea whether they are speaking with an operator in Baltimore or Bangalore. That’s because overseas call centers go to great lengths to help their staffs sound American, teaching them American accents and colloquialisms like “OK” and “no problem.”

Prof. David Butler, of the University of Southern Mississippi, says operators also learn the names of U.S. sports teams and use American-sounding names. “They are trying to connect with callers,” he explains.

They are also trying to avoid hang-ups. A survey by BenchmarkPortal Inc. found that 65 percent of American consumers would change their buying behavior if they learned a company was using an offshore call center. So it’s not surprising, says Butler, that some operators are taught to lie and say they are located in a U.S. city if asked.

“There’s nothing inherently wrong with accent neutralization. It helps communication,” says Don Van Doren, president of consultancy Vanguard Communications. “But when it gets deceptive, it can be damaging. You don’t want conversations to start from a position of mistrust.” —Joseph McCafferty

The Telephone Game

It’s been just over two years since Sarbanes-Oxley began requiring companies to provide employees with a way to anonymously report financial misdeeds. In practice, that has usually meant setting up telephone hotlines, most of them open to any type of ethics complaint. But along with each call about financial fraud, companies take dozens of calls on everything from gripes about co-workers coming in late to complaints from workers who say they are underpaid.

For employers, that means sifting through many calls to find the ones that require immediate attention. “We are finding it is a productivity drain,” says Tyco senior vice president of corporate governance Eric Pillmore. “But you don’t know when that one call will come in that [is about] a critical issue.” Tyco has a full-time employee devoted to taking hotline calls.

At smaller EnPro Industries, a manufacturer with 4,400 employees, human-resources director Sheri Tiernan says its hotline, now in its second year, averages a manageable three calls per quarter. “Fortunately, we have not had any calls of [a Sarbox] nature,” she says. Nonetheless, all of the calls are investigated and quarterly reports on hotline activity are provided to the audit committee.

Apart from dedicating a full-time staffer to field calls, outsourcing hotline management, as EnPro does, is a way to have the urgent problem calls parsed from the petty grumbling. The Network, a hotline-service provider based in Norcross, Ga., provides detailed reports of all calls, and categorizes the complaints. According to The Network’s call records, theft is the number-one reason employees at most companies pick up the phone (22 percent of the calls), followed by discrimination complaints (16 percent). Sarbox calls are tied with wage and hour complaints at 13 percent.

Still, says attorney Michael Nosler of Denver-based Rothgerber Johnson & Lyons LLP, callers don’t have to be right about a Sarbox complaint to receive whistle-blower status. “Even if they’re wrong, they’re protected under law from retaliation,” he says.

Under the regulation, employees can be held liable for up to $1,000 worth of the firm’s attorney’s fees for frivolous or groundless complaints, but that applies only if the complaints are formally lodged with the Occupational Safety and Health Administration. As for unrelated complaints to the hotline, says Nosler, that’s the cost of doing business today. —T.R.

Back to the Present

On the way to its first profitable year since the 1990s, Lucent Technologies may soon reap a windfall from a loss.

In September, the telecom-equipment maker said the Internal Revenue Service had tentatively agreed to a net operating loss (NOL) carryback yielding a whopping $816 million tax refund. “It’s one of the biggest I’m aware of,” observes Mark Silverman, head of Steptoe & Johnson’s tax practice.

Lucent obtained the refund by carrying its 2001 NOL back to 1996. Carrybacks have traditionally covered two years, but Lucent capitalized on a provision in the Job Creation and Worker Assistance Act of 2002, which allowed companies with NOLs in 2001 or 2002 to go back five years. The provision was targeted at telecom and other industries hurt by the recent economic downturn, says Jennifer Blouin, an assistant accounting professor at Wharton.

In an NOL carryback, the amount of the refund is equal to the difference between the loss and the cumulative tax liability of the carryback year and all ensuing years with taxable income. For Lucent to have received such a refund means that its 2001 NOL had to be massive — and indeed, Lucent lost $16.2 billion in 2001.

Other kinds of companies have benefited from the act. Westaff, a $500 million staffing company based in Walnut Creek, Calif., received a $4.7 million refund from its 2002 NOL, thanks to the five-year carryback stipulation. “We were in a fairly tight liquidity situation, so it made sense for us to claim the refund,” says CFO Dirk Sodestrom.

Profiting from Loss
Some recent NOL carrybacks.
Company Loss,
Amount of Refund
Lucent $16.2 billion, 2001 $816 million*
Westaff $3.5 million, 2002 $4.7 million
R.R. Donnelley $18.9 million, 2003 $40 million
Schering-Plough $92 million, 2003 $404 million
* Pending approval by the Congressional Joint Committee on Taxation and an IRS audit of 2001 returns.
Source: Various reports

Lucent’s refund is subject to an audit of its 2001 tax return and a review by the congressional Joint Committee on Taxation (which examines all refunds over $2 million). “While we are pleased to have reached this tentative agreement, we recognize that it is not finalized and there are some key hurdles to clear,” says Frank Briamonte, a spokesperson for Lucent. In its 8-K, Lucent said it could receive the money during fiscal 2005, pending the tax committee’s approval.

But some guess Lucent might get paid sooner. At $816 million, the committee probably won’t “sit on it too long,” says Fred Adam, a tax shareholder at Greenberg Traurig. —Ilan Mochari

China Bank Fraud Brings Executions

While some corporate officers continue to carp about the stiffer penalties being handed out by the Securities and Exchange Commission for accounting fraud, those punishments pale in comparison with what’s going on in China.

In September, amid a flurry of white-collar arrests, officials in the People’s Republic executed Wang Liming, a onetime accounting officer at China Construction Bank, the country’s largest property lender. According to reports, Wang defrauded the bank out of $2.4 million. Two other bank employees were also executed. In an unrelated corruption case, an officer at the Zhuhai branch of the Bank of China was put to death as well.

According to sources in China, the executions signal that the country’s new paramount leader, Hu Jintao, is serious — dead serious — about cleaning up its troubled banking sector. Those banks are facing increased competition from foreign rivals, which were granted limited license to issue renminbi-denominated loans this year. Before joining the World Trade Organization, China must fully open its financial sector to cross-border banks by 2007.

While decrying the recent executions, China hands point out that systemic corruption in the banking and property sectors threatens to derail the country’s rise to economic superstardom. That, in turn, would be bad news for U.S. corporates lusting after the vast consumer market on the mainland. Says U.S.-China Business Council president Robert Kapp: “If efforts by Chinese authorities to clean up the behavior of thousands, if not millions, of employees in the banking system are unsuccessful, it will be very difficult for American companies operating in China.” It’s also true, though, that the execution of corporate criminals could further stain China’s human-rights record.

The thought of going head-to-head with powerful global banking institutions can’t cheer executives at China’s four state-owned banks. Those banks are thought to be sitting on $200 billion in bad debt.

Meanwhile, officials in Beijing say they still intend to go ahead with the planned initial public offerings of both Construction Bank and Bank of China. But the IPOs — originally slated for this year — have been pushed back until 2005, a sign that things are not nearly right at the two financial giants. Another possible sign: late last year, the head of Construction Bank was sentenced to 12 years in prison for taking bribes. Apparently, he had a good lawyer. —John Goff

Conference Calls Can Air Dirty Laundry

During a conference call to discuss second-quarter results at Sears, Roebuck & Co., CEO Alan Lacy was prepared for a barrage of questions from analysts about why the company missed earnings expectations. What he was not prepared for was a question from an irate customer who had a bad experience with a washer delivery.

The customer posed as an analyst from Credit Suisse First Boston. “Alan, I purchased a washer and dryer from one of your Texas stores,” he broke in. The customer went on to describe a faulty installation and damage that was done during a delivery, and demanded to know what the CEO was going to do about it.

Sears spokesperson Chris Brathwaite says only that the company has a screening process during conference calls and that it was an isolated incident. But as conference calls become more open to the public, companies are increasingly concerned that they could be disrupted by callers who aren’t who they say they are, or have questions that aren’t related to the discussion. “It is one of the reasons companies didn’t want to open up the calls to the public after Regulation FD was passed,” says Richard Frankel, an associate professor at the MIT Sloan School of Management.

Most firms broadcast the calls over the Internet and continue to keep the ability to ask questions open only to analysts. “Reg FD does not require that the public be able to ask questions,” says Frankel.

A more common problem, says Louis Thompson, president and CEO of the National Investor Relations Institute, is when short-sellers get on a call and bad-mouth the company in an attempt to deflate its stock price. He says companies need to distinguish callers with their own agenda from those with legitimate, hard-hitting questions. “You shouldn’t retaliate by cutting them off,” says Thompson. “But if it’s harassment, that’s a different story.”

As for the unhappy Sears customer, “the issue was resolved to his satisfaction,” says Brathwaite. —J.McC.

Space Invaders

It’s not just Martha Stewart who is feeling a little confined these days. A report by the International Facility Management Association (IFMA), released earlier this year, shows that workspace is shrinking.

The space for general clerical staffers decreased from an average of 73 square feet in 1997 to 66 square feet in 2002, slightly larger than an 8′ x 8′ cubicle. Shari Epstein, associate director of research at the IFMA, says that floor space per person is continuing to drop. Companies are also favoring open floor plans and cubicles over offices. “The walls are coming down,” says Epstein.

The driving force behind the trend is cost reduction. Higher real estate prices have kept some companies from moving to larger facilities even as they add employees. “Reducing the space requirements per associate means adding savings to the facility’s bottom line,” says Tim McGlothlin, executive director of the Ergonomics Center of North Carolina in Raleigh.

Senior-level executives are also seeing their offices shrink. “Big, lavish office suites are less common for key executives,” says Epstein. In fact, top managers have lost 17 percent of their space, with the average size of an executive office reduced to 239 square feet in 2002 from 289 square feet in 1994, according to the study.

When Compuware Corp. moved its Detroit headquarters — home to roughly 4,100 workers — to a state-of-the-art facility, the software provider moved team managers from private offices to 8′ x 8′ cubicles. Larry Fees, vice president of facilities and administration, says the move was intended to encourage managers to interact more with their reports. “We wanted to involve managers more with their staff,” he says. Many of those staff members actually gained a little footage, since their cubicles increased to 8′ x 8′ from 6′ x 8′ The company also added more community areas, including living room­like areas with soft furniture intended to be used for downtime and informal meetings.

It’s clear that tiny cubicles are here to stay. But less is not necessarily more, says McGlothlin. “Less space per associate means less privacy and more distractions,” he says. That could translate into lower productivity and more human error. Just ask Dilbert. —J.McC.

Sarbox Support Groups

Sometimes you need a sympathetic shoulder to cry on. As companies struggle to comply with Section 404 of Sarbanes-Oxley, which requires them to document and obtain audits of their internal controls, some finance executives are organizing peer groups to share experiences, compare notes on their auditors, and vent frustrations.

One such group, in Silicon Valley, includes finance executives from about 30 technology companies who meet in informal sessions every other month. As Ed Pitts, director of internal audit at Foundry Networks and co-founder of the group, explains, “There is no precedence for [the regulation], so there is a lot of confusion about what is required.”

One common complaint is that auditors have inconsistent and evolving standards on what is required for a clean audit. Members of the group say requirements vary not just from firm to firm, but from audit partner to audit partner. “The same firm is telling different companies different things,” explains Pitts.

Karen Gebbie, director of internal audit at Echelon Corp., a device-networking-technology firm based in San Jose, Calif., says that the meetings have helped her clarify gray areas in the regulations. “The more we know about what other companies are doing, the better conversations we can have with our auditors,” she says.

Members also discuss what their Big Four auditors are charging for the audits. “They’re all over the map,” says Pitts. An informal survey of the group found that some members received estimates of as little as 30 percent of a regular audit for the 404 component, while others were quoted as much as 100 percent more.

Financial Executives International also facilitates networking on its Website, Colleen Sayther Cunningham, the organization’s CEO, says 404 compliance is a hot topic at FEI chapter meetings. On one point, all the executives agree: “The cost of this is astronomical!” —J.McC.

After the Storms

The four hurricanes that devastated Florida this summer packed a bigger punch than Andrew, 1992’s monster storm. Together, Charley, Frances, Ivan, and Jeanne racked up more than $20 billion in insured property damage, compared with Andrew’s $15.5 billion. The number of claims from the hurricanes is expected to exceed 2 million, surpassing Andrew’s 700,000, says the Insurance Information Institute (III).

So will property-and-casualty insurance rates skyrocket, as they did in Andrew’s wake? “Across most of the country, there will be little or no impact for property or casualty costs,” predicts Robert Hartwig, chief economist at the III. “If you’re in the Southeast, it’s possible you’ll see higher property costs next year.”

Why won’t insurers jack up rates this time? “One reason is that Florida set up a pool to handle a portion of the losses,” explains Clint Harris of Conning Research & Consulting Inc. in Hartford. “There was also a buildup of insurance capital following 2001 to replenish losses from 9/11 and Tropical Storm Allison.”

Another factor is the industry’s improved ability to manage catastrophe exposure, says John Iten, a director of Standard & Poor’s North American insurance- rating group. Following Andrew and 9/11, insurers stepped up their purchases of reinsurance. The result is an industry that covers itself for the worst. “It is amazing how big a difference there’s been between Andrew and these storms,” says Iten.

Of course, businesses in hard-hit Florida may be forgiven for expecting an uptick in rates. “We’d certainly expect with this level of activity that rates are going up,” says Richard Aldred, CFO of Fidelity Federal Bank & Trust in West Palm Beach, which suffered roof damage at one of its properties during Charley.

Aldred plans to offset any premium increases by paying higher deductibles and by mitigating Fidelity’s risk via revamped hurricane shutters and straps on company buildings. Performing structural analyses is another way to minimize costs, experts say. “Uncertainty about your buildings can increase your prices, because insurers make conservative assumptions,” says Paul VanderMarck, executive vice president of Risk Management Solutions Inc. in Newark, Calif. “The more data an insurer has, the better it can understand your risk and price you appropriately.” —I.M.

Leaves of a Different Color

As goes California, so goes the nation. At least that is the case with a new paid family leave law that went into effect on July 1. Now 27 other states are considering similar options. The problem for employers: the rules all promise to be different.

California’s law, which was first enacted in 2002, builds on the federal Family and Medical Leave Act of 1993, with an important difference: the state’s law guarantees employees six weeks of partial pay within any 12-month period if they need time to care for a newborn, sick child, or other family member. The federal law, on the other hand, allows up to 12 weeks of unpaid leave for such purposes.

For their part, most employers are not required to contribute to the program. In-stead, employees participate through payroll deductions and are eligible to receive 55 percent of their weekly pay annually, up to a maximum of $728 a week. That doesn’t mean there aren’t costs, however. For companies that opt out of California’s disability system, there could be costs associated with running the program privately, since companies can’t charge employees more than .08 percent of their taxable wages annually, but must match the state’s benefits.

The bigger problem, however, may be administering the program. “Companies are already dealing with sick time, vacation time, and leave, and now they have to add this to the mix,” says Ron Mason, principal of Towers Perrin. What will be particularly troublesome is when other states enact similar legislation, he adds. In 2003, 27 states offered 73 paid-leave legislative proposals — 9 of which mirrored California’s law. “The problem is that states never duplicate one another in these types of legislation,” says Mason. That means many companies will soon have to juggle multiple programs.

In California, the first few months of the program have been rife with glitches. Inadequate staffing and computer systems have led to backlogs, even though fewer employees than expected have applied for the benefit. “The brutal reality is that only one employee has utilized the leave so far,” says Thomas A. Schreck, CFO of Cupertino, Calif.-based Durect Corp., which has a workforce of 130.

That may not be the case for long. “Many employers haven’t been hit with the full impact of the law,” says Ophelia Galindo of Mercer Human Resource Consulting, who predicts a steady increase in employees taking advantage of the benefit. —Lori Calabro

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