Audit Overseer Cited Problems in Previous Post
The New York Times
October 31, 2002
By STEPHEN LABATON
WASHINGTON, Oct. 30 - Shortly before William H. Webster was
appointed to head a new board overseeing the accounting profession by the
Securities and Exchange Commission last Friday, he told
the commission's chairman, Harvey L. Pitt, that he had until recently headed the
auditing committee of a company that was facing fraud accusations, Mr. Webster recounted today.
Mr. Pitt chose not to tell the other four commissioners who voted
on Mr. Webster's nomination that day, according to S.E.C. officials. White House
officials said they, too, were not informed about the details of Mr. Webster's work for the company.
The small publicly traded company, U.S. Technologies, is now all but insolvent
and it and its chief executive, C. Gregory Earls, are facing suits by
investors who say they were defrauded of millions of dollars.
The suits contend the misconduct occurred in late 2001 and this year. That was after
the three-person audit committee, headed by Mr. Webster, had voted to dismiss the outside auditors in the summer of 2001 after those auditors
raised concerns about internal financial controls.
Mr. Webster, the 78-year-old former director of the C.I.A. and F.B.I.,
said he told Mr. Pitt and Robert K. Herdman, the agency's chief accountant,
about the investor lawsuits before he was approved last Friday.
"I told them that people are making accusations," Mr. Webster said
of his conversation with Mr. Pitt before he was appointed last Friday. "I said if
this is a problem, then maybe we shouldn't go forward. I raised it because
I didn't want it to become an issue."
Mr. Webster said he was assured by Mr. Pitt that the staff of the commission
had looked into the issue and that it would not pose a problem. Mr.
Pitt had urged Mr. Webster to take the job.
But U.S. Technologies' former outside accounting firm, other members
of the audit committee, company executives, and investors and their
lawyers who say they were defrauded say they were never called by
anyone at the commission about Mr. Webster's candidacy for the new oversight
board.
Last Monday, three days after Mr. Webster was appointed, he called
Mr. Pitt again to say he had heard over the weekend from another former
director that a government investigation had recently begun to examine
possible fraud by the chief executive of the company, Mr. Webster said.
Lawyers involved in the case say the inquiry, by federal investigators in Manhattan,
is actually examining whether Mr. Earls, who recruited Mr.
Webster, used the company to violate criminal fraud laws. Mr. Webster
is not a target of the investigation. Mr. Pitt did not tell the other
commissioners about the Monday conversation either, S.E.C. officials said.
Mr. Pitt declined to discuss the selection of Mr. Webster or U.S. Technologies.
Christi Harlan, a spokeswoman at the S.E.C., said that Mr. Webster
informed the commission's accounting staff, headed by Mr. Herdman,
about his service on the board of the company and that the staff concluded
that there was nothing worthy of passing on to other commissioners or that
would disqualify Mr. Webster.
"What matters is we believe Judge Webster will be a fine chairman of the
Public Companies Accounting Oversight Board," Ms. Harlan said.
Claire Buchan, a White House spokeswoman, referred calls about the selection
of Mr. Webster to the S.E.C.
The accounting oversight board is the centerpiece of legislation approved this
summer in response to the wave of scandals at companies like Enron,
Arthur Andersen and WorldCom. It was created to supervise an array
of professional issues, including disciplining accountants and inspecting the
largest firms.
The commissioners split bitterly over the qualifications of Mr. Webster
and his selection over John H. Biggs, who was considered by some in the
profession to be too aggressive. In his dissent, one S.E.C. commissioner,
Harvey J. Goldschmid, said the selection process had been flawed and
inept and had failed to vet the candidates properly. Mr. Goldschmid declined to comment.
Mr. Webster stepped down from the board of U.S. Technologies in July
after he said he was told that it could no longer provide liability insurance
for directors and officers against claims from investors.
The company invests in young Internet companies and runs a
contract labor company using prison inmates. It has had a variety of legal and
regulatory difficulties. While Mr. Webster headed the audit committee, it was
delisted from trading on Nasdaq for failing to make timely filings
with the S.E.C.
The suits filed by investors allege that fraud occurred after the
company's auditor, BDO Seidman, says it notified the auditing committee in May
2001 that U.S. Technologies had several serious weaknesses in its internal financial controls.
The company initially reported to the S.E.C. that BDO Seidman auditors
had been dismissed not because of any disagreements or qualifications
but only because of "an explanatory paragraph that discusses factors that
raise substantial doubt" that U.S. Technologies had the "ability to
continue as a going concern."
But U.S. Technologies was forced to amend its filing a few weeks later,
after BDO Seidman executives sent a letter explaining that their firm had
found serious accounting problems at the company.
BDO Seidman accountants wrote: "In a letter dated May 9, 2001, issued on
Aug. 31, 2001, and in a telephonic audit committee meeting on July 13,
2001, BDO Seidman L.L.P. communicated a material weakness in internal
control to the audit committee and management relating to financial
and accounting infrastructure including lack of an experienced C.F.O.,
deficiencies in recording material transactions timely, and in the
organization and retention of financial documents and accounting records."
Mr. Webster said the company responded by hiring a more experienced
chief financial officer. He said the auditing committee did not look into the
other problems mentioned by BDO Seidman accountants. He said that
executives at U.S. Technologies had been concerned about the auditing bills
of BDO Seidman and about the lengthy time it had taken to perform the audits.
BDO Seidman, which will be regulated by the new accounting oversight board,
declined through a spokesman to comment about its work for U.S.
Technologies.
Lawyers involved in the criminal investigation said there was no evidence
that Mr. Webster violated any laws and he was not the target of the
inquiry. But critics of his selection to the oversight board said the audit
committee's decision not to investigate thoroughly and make public its
findings demonstrated that he lacked the qualifications to lead the board.
"Even if we find out that Webster was totally passive in this process,
it is an indictment on his ability to run the accounting oversight board," said
James D. Cox, a professor of securities and corporate law and author of
a textbook on accounting who teaches at Duke. "To let something like this
go shows really bad judgment, and I think is automatically disqualifying.
At a minimum, the audit committee had an obligation to investigate. This
is exactly the kind of situation that the accounting oversight board is
supposed to change, and that the new law creating the oversight board is
supposed to fix."
Mr. Webster said he did not think his experience at U.S. Technologies
"would impair my ability to serve."
"But that is not for me to judge," he said. Speaking of the commission, he added:
"I always made a point of telling them everything I knew. I'm sure
they wouldn't have gone through with it if they didn't have confidence in me."
At the center of the investigation and the suits over U.S. Technologies is
Mr. Earls, the company's chairman and chief executive, who recruited Mr.
Webster and other prominent Washington figures to serve on its board and invest
in the company. The board members included George Mitchell,
the former Senate majority leader, and Beth Dozoretz, the former finance
chairwoman of the Democratic National Committee.
Mr. Earls has recently suffered some court setbacks.
A decision two months ago in one of those cases by a Delaware judge
concluded that there was significant evidence he had committed a pattern of
misrepresentations "that may rise to the level of criminal conduct" in connection
with USV Partners, which Mr. Earls controls and is a large
investor in U.S. Technologies.
The judge also found "credible evidence" that Mr. Earls
"has exhibited a pattern of defrauding investors" by using a variety of partnerships and
other "special purpose entities" controlled by him.
After reciting a list of court cases against Mr. Earls, the judge, Vice Chancellor
Jack Jacobs, said, "Although claims of wrongful conduct in
unrelated cases certainly do not establish that Earls mismanaged USV,
the ever-increasing pattern of fraud claims against Earls lends further
credibility to the other evidence that does tend to establish that Earls has mismanaged USV."
In a separate civil case filed in July in federal court here, a few days after Mr. Webster
resigned from the board, an investor accused Mr. Earls and
U.S. Technologies of stealing for Mr. Earls's own benefit almost $2 million
last year by diverting what were supposed to be investments. Mr. Earls's
lawyers have denied the accusation.
Thomas Green, a lawyer who represents Mr. Earls, said that
his client violated no laws and that the company had been a victim of the downturn in
the economy.
nytimes.com Copyright The New York Times Company |
