U.S. SEC's Push for Accounting Changes Already Having Impact on Companies
Washington, Dec. 26 (Bloomberg) -- U.S. companies, under
fire from federal regulators to clean up their financial reports,
are moving more aggressively to nip accounting manipulation in
the bud, financial experts said.
''A whole new religion is developing out of the heightened
awareness on this issue,'' said Robert H. Herz, a partner at
PricewaterhouseCoopers, a Big-Five accounting firm.
U.S. Securities and Exchange Commission Chairman Arthur
Levitt says a top priority for 1999 will be a crusade against
companies that tailor quarterly earnings reports to meet Wall
Street expectations. The agency's high-profile effort is
beginning to have bite, accounting executives say -- even before
any rules are changed.
As an outside auditor for three manufacturers, for example,
Herz said he recently saw the audit committees of the companies'
boards do something they'd never done before -- quiz company
executives closely on their accounting methods. ''The audit committees were giving notice there'd be a richer dialogue from now on,'' Herz said.
Other corporate efforts also are likely to pick up steam
next year as the SEC turns up the heat. Companies are starting to
step in early to deflate overly rosy forecasts of corporate profits by securities analysts, said Frank Borelli, chief financial officer of Marsh & McLennan Cos., the world's largest insurance broker.
'Hocus Pocus'
''Companies will now be a lot more careful in saying 'yea'
or 'nay' to analysts' first cut on earnings,'' he said.
Analysts' forecasts can put pressure on company executives
to make sure their results meet expectations -- and avoid a
market reaction that drives down the company's stock price,
Borelli said.
Levitt pointed to just that pressure in September, when the
SEC chairman launched the agency's accounting push. In a high-
profile speech, he faulted company executives, auditors and
analysts for using accounting ''gimmicks,'' ''hocus pocus,'' and
''illusions'' to make earnings meet projections.
The SEC is mounting its effort on several fronts -- studying
new rules, stepping up enforcement cases, and challenging the way
revenue and expenses are recorded in some financial statements
filed with the agency.
Levitt's moves follow widely reported bookkeeping problems at companies such as Cendant Corp., Sunbeam Corp., and Livent
Inc.
Tougher Enforcement
The SEC chairman, working with professional accounting groups, is seeking new and clearer accounting rules. One initiative calls for a panel headed by John C. Whitehead, former Goldman, Sachs & Co. co-chairman, and corporate governance expert Ira Millstein to recommend improvements in corporate audit committees.
Levitt also is toughening the agency's policing of accounting practices. SEC enforcement chief Richard H. Walker recently said he is shifting resources to make detection of financial fraud his top priority.
In its first case under the heightened scrutiny, the SEC alleged that W.R. Grace & Co., the Florida chemical company, stashed reserves during the early 1990s to inflate later earnings that fell short of expectations. Grace is contesting the charges.
Livent has said the SEC plans to file charges in connection with
accounting problems that led the theatrical production company to
restate more than two years of financial results and file for
bankruptcy protection.
The commission also has been scrutinizing financial
statements, particularly targeting a popular write-off for
unfinished research projects acquired in a corporate takeover.
The agency has said big write-offs can inflate future earnings.
Problem Exaggerated?
MCI WorldCom Inc., in a prominent example, said that after
guidance from the SEC the company pared about $3 billion from its
initial estimate of a research-related write-off involving its
acquisition of MCI Communications Corp. America Online Inc.
delayed reporting operating results for its fiscal fourth quarter
because of talks with the SEC about the size of its charges
related to two acquisitions.
While Levitt's efforts have drawn praise from investor
groups, many accounting experts -- including some of his allies -
- said the SEC chairman exaggerated the extent of the problem.
''While there are some egregious examples, in the overall
scheme of things you're talking about a very small number of
incidents relative to 13,000 public companies,'' said Edmund
Jenkins, chairman of the Financial Accounting Standards Board, a
professional rule-writing group overseen by the SEC.
The vast majority of U.S. companies and accountants, Jenkins
said, are making good-faith efforts to adhere to U.S. financial-
reporting standards.
SEC Initiatives
Levitt, in attacking a limited problem so broadly, also may
run the risk of having his efforts backfire somewhat, another
accounting expert said. ''Some companies may delay announcing
their earnings because they want to be extra careful,'' said
Dennis Beresford, a former FASB chairman who now is a University
of Georgia accounting professor.
Still, the specialists agreed, SEC initiatives are likely to
bear fruit next year. Among other things, they said they expect:
-- Small and mid-sized companies to seek more independent
board members to staff their audit committees. Most large
companies already have outside directors on their audit panels.
-- Companies to disclose more of the reserves they set aside
from earnings, and more of the restructuring charges they take
for factory closings and layoffs.
-- High-technology companies to take a stricter approach to
valuing unfinished research acquired when they take over other
companies.
Some companies have misused these charges and reserves to
boost their future reported earnings, Marsh & McLennan's Borelli
said. Upcoming changes ''will level out company earnings a bit
more,'' he said.
For all the changes in the air, it isn't clear whether
they'll produce a lasting impact on U.S. accounting practices.
One unknown is whether the most important person in the financial
reporting mix -- a company's chief executive -- will respond by
giving as much priority to financial reporting integrity as to a
rising stock price, accounting experts said.
''The CEO's attitude is crucial for setting tone and
priorities,'' said Donald Kirk, a member of the five-person
Public Oversight Board, a professional peer-review group.
Another key factor will be the attitudes of regulators,
financial executives and accountants. They'll need to maintain
external and internal pressure for accounting excellence, the
specialists said.
''Otherwise, this could be the fad of the day, and we'll
revert in a year to business as usual,'' PricewaterhouseCooper's
Herz said.
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