Numbers game and blame
Flurry of restatements expected
By Aldo Svaldi
Denver Post Business Writer
Sunday, July 07, 2002 - Multibillion-dollar lapses at Enron, Xerox and WorldCom may be just the beginning.
"We are going to see an avalanche of (financial) restatements between now and the end of the year," said Allan Koltin, whose Chicago-based Practice Development Institute Inc. is one of the nation's leading consultants to the accounting industry.
More than 2,000 public companies are changing auditors following the conviction of Arthur Andersen on obstruction-of-justice charges. And many are changing management after years of shaky performance.
Experts say the new auditors and managers will distance themselves from the financial sins of their predecessors, and the adjustments they may make to past financial statements will continue to haunt the stock market and erode the public's trust.
Locally, Qwest Communications International best fits the pattern - a new CEO, a new auditor and accounting practices that are under investigation.
"If there is a time to air all the dirty laundry, it is when the new guy goes into Qwest," said Andre Ratkai, a Denver money manager with Praxis Advisory Group.
A restatement occurs when a company, either voluntarily or under pressure from regulators, admits and corrects mistakes in its accounting. Investors typically anticipate a significant restatement, driving down the stock price.
Two weeks ago, WorldCom Group admitted it had masked expenses and inflated earnings by $3.9 billion, creating the largest earnings restatement in history.
Restatements, in some rare cases, can work in a company's favor. Shares of Atlantic & Pacific Tea Co. rose Friday after the supermarket holding company reported narrower losses for the past two years.
Min Wu, a doctoral researcher at New York University, said three of the largest restatements ever have come in the past year, and like Koltin she expects 2002 will be unprecedented. The old record came in 1999, when U.S. companies made 204 restatements.
It seems the collapse of Houston energy trader Enron Corp. forced more attention on questionable financial practices, and the apparent demise of Enron's auditor, Arthur Andersen, has put the surviving Big Four accounting firms on edge.
Nearly one out of five public companies in the United States relied on Andersen as auditor, Koltin said. About 800 have already switched auditors and another 1,500 will do so soon.
About 10 percent of the restatements that occur each year come after a new auditor finds problems.
"With any new audit under any new circumstances, you have to get comfortable with past accounting," said Mark Wehrle, Deloitte & Touche's audit partner in Denver.
Added to that initial caution now among auditors is an overriding fear of meeting the same fate as Andersen.
Auditors become cautious
Andersen didn't keep as tight control over its local accounting teams and generally was more willing to stretch its interpretations of the rules, observers said.
"Andersen has a reputation of being aggressive in energy and telecom," said Kevin O'Brien, an associate professor at the University of Denver Daniels College of Business. "Anybody that audits an Andersen client has to be careful."
Overall, the mood among auditors has turned more conservative and cautious, said Mark Cheefers, chief executive of the Massachusetts-based consulting firm AccountingMalpractice.com.
Accountants are going to think twice before helping client push the rules.
"If you issue one quarterly statement where you have accepted this accounting treatment, then you could be held liable for it," Cheefers said. "No one wants to hear about gray areas."
Most firms that have grabbed Andersen clients have also hired former Andersen accountants to help with the audits. Koltin said those accountants should know where the bodies are buried and likely will help uncover them.
As new auditors uncover questionable practices and in some cases fraud, they are likely to come to management. Executives in turn can either bring them to light voluntarily or try to keep them under wraps until forced to reveal them.
"We will see a lot of internal actions by corporations trying to figure out if they have any kind of problems or exposure," said Carr Conway, a senior forensic accountant at Dickerson Financial Investigation in Denver.
Companies that expect to get a pass because they come forward with their mistakes will be sorely disappointed, he said.
Investors, regulators and the stock exchanges are in no mood to show mercy, and depending on the size of the restatement, a company's very survival could be at stake.
One red flag to watch is for a new auditor that either resigns or gets fired.
Burt Bondi, a local Denver CPA with Bondi & Co., said auditors face tremendous pressures and will not get much help from the staff at a company that has serious accounting mistakes or outright fraud.
For that reason, the experts said the best odds for a company coming clean and disclosing a restatement are when a new executive team is working with a new audit team.
Wu said that historically a company will restate earnings and then the CEO, if he or she is going to resign, will do so after the announcement, providing the sacrifice to appease investor anger.
Problems now pop up later
But a different pattern has emerged in the past year. A CEO resigns without reference to accounting issues, often after having reaped huge sums in options and bonuses from the company. Months later, a new management team uncovers significant problems.
That, was the pattern with Enron and WorldCom, and it could prove the case in several other high profile CEO departures.
As Jean-Marie Messier walked away from his post as CEO of Paris-based Vivendi Universal on Tuesday, questions surrounding accounting practices at the media giant followed him.
Similar accounting concerns hang over Tyco, Dynegy and Qwest, all of which have seen CEO resignations in recent months.
Should companies try to keep their accounting problems in the closet, as Conway suggests many might attempt, how would they do it?
A new accounting rule change regarding goodwill write-downs might offer them a way to dump evidence of past accounting errors without attracting undue attention, Cheefers said.
Not every company has to take a write-down, but most of those that do will likely take the charge in the second quarter, and they could slip additional charges in what accountants call the "big bath.' "
But Cheefers said U.S. stock markets won't see a recovery until confidence is restored in the financial reporting system.
"I don't see anything to be gained from not bringing it up," Cheefers said of accounting problems.
Constant revelations of fraud, deceit and coverups will only cut into the diminishing shreds of trust investors have in Corporate America.
"If the marketplace has demonstrated anything the last six months, it is that its underpinnings rest in the integrity and reliability of the financial numbers being reported," he said. |
