April 06, 2002
Accounting abuses in North America

A BusinessWeek reader wrote "Our research on approximately 200 cases of financial-statement fraud between 1987 and 1997 indicated that criminal charges were filed only 15% of the time, and we found evidence of only 27 individuals serving jail time. Even if SEC Chairman Harvey Pitt's "CEO misbehavior" plan is implemented, the penalties for committing fraud still pale in comparison to the enormous damage inflicted on the investors, employees, and other stakeholders." The justice department needs to go after the wrongdoers rather than the organizations. More importantly, it needs to put checks in place.

It is now quite clear that the accounting abuses in Enron was not an isolated case. It is simply the most well-publicized one. e.g. The scandal brewing at Qwest has the potential to bring out a lot of skeletons from the cupboards too. To quote from the same article:

    "SEC is examining is Qwest's sales of capacity on its network. Qwest, like many telecoms, sold slices of capacity on its network ....(IRUs)--to other phone companies while buying IRUs from other service providers. ....If two companies, for example, sell each other IRUs valued at $100 million, both companies can book revenues of $100 million today, but they spread the cost of the $100 million purchase over the life of the contract, typically 20 or 25 years. The result is that a company's financial statements look good today, although no net cash has changed hands. ...What the SEC is investigating is whether Qwest, Global Crossing Ltd., and others sold each other network capacity to inflate their financial statements, without any real business purpose. In the first six months of 2001, Qwest sold $857 million (and) ...bought $450 million in (network) capacity from some of those same companies. The sales helped Qwest's revenues rise 12%, to $10.3 billion, for that time period. Without those transactions Qwest's revenues would have grown only 7.5%, to $9.4 billion."
    "Qwest's top execs were selling stock at the time its critics allege accounting improprieties may have occurred at the company. CEO Joseph P. Nacchio sold 2 million shares of Qwest stock in the first half of last year, realizing $74.6 million. That was slightly more shares than he sold in all of 2000. And on May 2, 2001, Qwest founder Philip F. Anschutz sold roughly 10 million shares for $408 million, according to SEC filings....The timing of the sales may be critical because they occurred just before Qwest's stock nosedived. "

Essentially, SEC needs to take a long hard look at how accounting is practiced today's world and what needs to change to accomodate the changing business and technology and consulting landscape. That doesnt seem likely for two reasons:

1. There seems to be very little appetite for structural reforms in Washington.

2. Harvey Pitt. He seems to have an almost religious belief in the ability of the market to regulate itself and isnt likely to push for additional regulations.

Its a pity. Because if there were ever a time when this could fly. It is now.

Posted by Kaushik at April 06, 2002 07:48 PM
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