SEC to Inspect Company Reports for Signs of Fraud
Washington, March 14 (Bloomberg) -- The Securities and Exchange Commission will inspect thousands of new annual reports from companies next month, looking for signs of revenue manipulation, SEC officials said.
The SEC's yearly review will cover the annual reports of as many as 3,000 companies, about one-fourth of all U.S. public corporations, said Robert Bayless, chief accountant of the SEC's corporation finance division. That's almost four times the number of reports that were examined last year.
The watchdog agency also will apply rigorous new federal standards on how companies should record revenue, SEC Chief Accountant Lynn Turner said in an interview.
``If we'd been doing this a year or two ago, I suspect we wouldn't have had a Lucent or a Xerox,'' Turner said.
Lucent Technologies Inc., the largest phone-equipment maker, and Xerox Corp., the largest copier company, are among several companies that have announced in recent months that they are under SEC inquiry for possible accounting fraud.
The SEC is likely to ask some companies to revise their reports, SEC Deputy Corporation Finance Director Michael McAlevey said. If companies balk at requested changes, the agency might take that into account the next time they register to sell stock or participate in a merger or acquisition, he said.
Investor losses from corporate accounting fraud have snowballed to more than $100 billion in the last eight years, Turner said. Abuses in revenue recognition have been the No. 1 source of recent financial fraud, he said.
Inflated Earnings
These abuses typically have occurred when companies booked revenue for sales that never took place or that hadn't been confirmed, or when they accelerated or deferred revenue to another quarter, Turner said.
Former SEC Chairman Arthur Levitt blamed some recent cases of accounting fraud on company executives who manipulated revenue and inflated earnings to meet Wall Street analysts' forecasts. These executives were trying to prop up their companies' stock prices, said Levitt, who retired last month.
Some corporate groups expressed skepticism that the SEC's expanded review would have much impact on accounting fraud.
``People intent on committing fraud will do it despite the rules, and will do a darn good job of hiding it,'' said Brian Borders, president of the Association of Publicly Traded Companies. ``People filing reports in a timely manner are probably not the ones likely to commit it.''
Borders, whose group consists of hundreds of small- and mid- sized public companies, also said SEC-mandated changes in the structure of annual reports might confuse investors. Shareholders might have trouble comparing a company's current results to those from previous years, as well as results of different companies in the same industry, he said.
More Requests
An accounting executive said he expects the SEC to make ``a fair number of requests'' for more accounting information from companies.
``This will impose a significant amount of administrative costs on companies,'' said Frank Minter, president of Montvale, New Jersey-based IMA, an association of corporate accountants. ``You'll get some very good revenue reporting, but the SEC will want to go beyond.''
The SEC implemented tougher new guidance on revenue recognition last December. One provision of this Staff Accounting Bulletin No. 101 requires companies to wait until a product is delivered and accepted by a customer before they record a sale.
The SEC review of annual reports, which are due to be filed with the government by March 31, will focus on several issues besides revenue recognition, Bayless said in a recent speech. These other areas are a company's division-by-division breakdown of revenue, as well as its disclosures of credit risk, derivatives use and market risk, he said.
Combing Filings
The examination will begin in the first half of April, the SEC's McAlevey said in an interview. SEC employees then will spend about a month combing through the filings. SEC officials declined to disclose the criteria that will be used to select which annual reports will undergo review.
Companies are required to separate out revenue for each of their businesses, a practice known as ``segment disclosure,'' so that investors can see how each area is performing, McAlevey said. Many corporations have resisted making these breakdowns in recent years, he said.
``Let me warn you that our patience with deficient segment disclosure has been exhausted,'' Bayless said in a speech earlier this month to securities lawyers at the SEC Speaks conference.
The biggest losses -- as measured by a company's drop in market value a week after accounting irregularities were disclosed -- have been at Cendant Corp., MicroStrategy Inc., and McKesson HBOC Inc., the SEC's Turner said.
Mar/14/2001 14:29 ET
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