Accounting used to be black and white, but in recent years companies have employed a host of techniques designed to produce investor-friendly results. Examples include pro forma earnings, lending money to customers for product purchases and assigning losses to subsidiaries.
While legal, the techniques mask a company’s true fiscal health. And as the Enron scandal rages, the call for stricter oversight is reaching a crescendo among legislators, regulators and shareholders.
“Our hope is that public companies will go beyond the minimum legal requirements and serve investors with the very best possible discussion of the company’s
financial position and operating results,” SEC chief accountant Robert K. Herdman, said in a recent statement.
Beyond hope, the SEC is mulling new rules to prod companies to publicize “critical accounting policies, important assumptions underlying reported results and material off-balance sheet activities.”
Looking to avoid the taint of financial impropriety many companies aren’t waiting for revised rules.
The first is an internal audit relating to a $4 million contract from its Asia-Pacific unit. Enterasys suspended three staffers and hired a “forensic accounting team” to
follow the money.
The scenario, though on a much smaller scale, has an eerie parallel to the dealings that brought down speech recognition software maker Lernout & Hauspie last
Enterasys also disclosed an SEC probe. Company executives say they are cooperating fully. They added that the inquiry was announced at an “early stage,” before it
was required to do so.
That did little to assuage skittish investors, who beat ETS shares down 57 percent in a massive sell-off.
Likewise, Global Crossing is playing damage control. The SEC has asked
the bankrupt voice and data carrier to provide documents and a letter written by former vice president of finance Roy Olofson.
The letter alleges that Global Crossing and its auditor, Arthur Andersen (of Enron infamy), improperly booked revenue and misled investors by downplaying
capital and interest costs.
Global Crossing maintains its practices were above-board and that numerous internal reviews and reviews by outside counsel found Olofson’s
At issue is a piece claiming the company “glosses” over merger and integration costs. TMP president and COO Jim Treacy said merger and integration costs have been disclosed in all quarterly earnings press releases as well as SEC
While TMP appears to have a solid defense against the charges, its stock is still down 15 percent from when the story first hit newsstands and Internet chat
rooms, showing that even the specter of accounting scandal can damage a company’s prospects.
Whatever Enron’s resolution, changes are coming to America’ corporate accounting rules. Hopefully for investors, they will help eliminate
some of the shades of gray that have crept in.