SEC's Levitt Announces Plan to Stem Earnings Manipulations
Bloomberg News
September 28, 1998, 6:03 p.m. ET
SEC's Levitt Announces Plan to Stem Earnings Manipulations
New York, Sept. 28 (Bloomberg) -- U.S. Securities and
Exchange Commission Chairman Arthur Levitt announced a series of
accounting initiatives to stem what he described as widespread
company manipulation of financial reports.
''Increasingly, I have become concerned that the motivation
to meet Wall Street earnings expectations may be overriding
common sense business practices,'' Levitt said in a speech to be
delivered in New York later today. ''I fear that we are
witnessing an erosion in the quality of earnings.''
Corporate executives, auditors, and Wall Street analysts are
increasingly part of ''a game of nods and winks'' in which
financial reports are ''distorted'' to meet analysts'
projections, Levitt said. In his most sweeping criticism of
accounting problems, the top U.S. securities regulator said these
misleading results jeopardize ''the credibility of our markets.''
Levitt outlined plans for the SEC and professional
accounting groups to put together plans to help make financial
statements present a clearer picture of a company's bottom line,
and to tighten oversight of corporate audit committees.
One initiative calls on the New York Stock Exchange and the
National Association of Securities Dealers to form a panel to
improve the performance of the audit committees of corporate
boards. The panel, headed by John C. Whitehead, former co-
chairman of Goldman, Sachs & Co., and corporate governance expert
Ira Millstein, is to report recommendations within 90 days.
Most corporate audit committees ''cry out for adjustment,''
Levitt said. The SEC chairman, though, cited Pfizer Inc. for a
committee that ''works properly.'' The audit committee of the
fourth largest U.S. drugmaker, which consists of four outside
directors, meets with outside accountants without company
management being present, said Brian McGlynn, a Pfizer spokesman.
He said the committee met six times last year.
Accounting Problems
The plan Levitt announced culminates months of SEC meetings
with dozens of company executives, accounting professionals and
analysts aimed at finding ways to head off accounting problems
like those that recently hit Cendant Corp., Sunbeam Corp. and
Livent Inc.
Levitt described an array of accounting ''gimmicks,''
''hocus pocus'' and ''illusions'' used by companies to manipulate
earning reports.
Specifically, Levitt criticized misuse of so-called ''big
baths,'' which are large, one-time restructuring write-offs used
by companies to disguise operating expenses. Companies also are
too often manipulating their earnings by using creative
accounting for mergers and acquisitions and prematurely
recognizing revenue, Levitt said. Additionally, he criticized
companies that call certain items ''immaterial,'' arguing they
don't need to disclose such events.
Industry Support
Robert H. Herz, chairman of the American Institute of
Certified Public Accountants' SEC regulation committee, said
accountants support many of Levitt's proposals.
''It is in our interests to make sure people have the
assurance that numbers are relevant and reliable,'' said Herz, a
partner with PricewaterhouseCoopers. Accountants increasingly
feel pressure from companies, which themselves are under pressure
''not to disappoint the analysts and not to have earnings
surprises,'' he said.
Brian Borders, head of the Association of Publicly Traded
Companies, which represents 1,000 small and mid-sized businesses,
said abuses mentioned by Levitt do happen -- ''but I have no
basis to believe it's widespread.''
Accounting Rules
In the plan, Levitt specifically called for:
-- The SEC to formulate accounting rules and interpretations
on revenue recognition, restructuring reserves, materiality, and
disclosure.
-- The Financial Accounting Standards Board, a professional
group that writes accounting rules for U.S. business, to set
priorities for current standards-setting projects.
-- The American Institute of Certified Public Accountants to
give greater guidance to heighten scrutiny by auditors of
problematic accounting practices during audits.
-- The Public Oversight Board, a self-regulatory oversight
group set up by the accounting profession and the SEC, to create
a panel to review the effectiveness of recent changes in the
audit process.
In addition to calling for changes by accountants, Levitt
also issued a verbal challenge to corporations and Wall Street
analysts. ''I believe we need to embrace nothing less than a
cultural change,'' Levitt said. ''To Wall Street, I say, look
beyond the latest quarter.''
--Liz Skinner and Neil Roland in Washington (202) 624-1868/bd |
