NewsNotables – Issue 37

Unfazed by Conviction, Firm Keeping CEO on the Payroll

Associated Press, 8/03/2004
Unlike many fellow inmates, Andrew Wiederhorn won’t have to worry about finding a job when he is released from federal prison. In fact, the chief executive of Fog Cutter Capital Group will be making $2.5 million while he serves his 18-month sentence.

His company’s board of directors voted to keep Wiederhorn on the payroll and even make him eligible for a bonus after he pleaded guilty to a pair of felonies in the financial collapse of a company that loaned him $160 million.

Wiederhorn pleaded guilty June 3 to filing a false tax return and paying an illegal gratuity to the former chief executive of the company that loaned him money before he took a job at Fog Cutter. Fog Cutter has been warned it could be delisted from the Nasdaq Stock Exchange, and its auditors have resigned.

Comment: Should a convicted felon work or be paid, including a bonus, while serving time in a federal prison for filing a false tax return and paying an illegal gratuity?

Auditor-Client Breakups Rise, While Disclosure Often Lags

The Wall Street Journal, 8/03/2004
The relationship between companies and auditors is looking more like the modern marriage: increasingly likely to end in a split. Through the end of July, roughly 900 companies announced that they have either fired their auditors or that their auditing firm has called it quits.

A change in auditor is on the SEC’s list of must-disclose events, but investors can still have a hard time getting the whole story from the required announcements. Because a decision to change is sensitive, there are incentives for making the public disclosure as innocuous as possible.

Comment: Other than a scheduled rotation, auditors resigning and clients “firing” their auditors almost always occurs due to a disagreement on accounting issues (I’ve been there). Even though this is a sensitive issue for both parties, more complete disclosure must be made in fairness to shareholders and potential investors.

Halliburton Settles SEC Probe Into an Accounting Disclosure

The Wall Street Journal, 8/04/2004
Halliburton Co. agreed to pay a $7.5 million penalty to settle a SEC investigation into the company’s failure to disclose a change in the way it accounted for cost overruns on large construction projects.

The SEC said that while the new accounting treatment was appropriate, not disclosing the change for a year and a half beginning in mid-1998 misled investors and prevented them from accurately assessing the company’s income. The SEC found the new accounting method either reduced or eliminated reported losses from cost overruns in certain quarters.

For instance, in the fourth quarter of 1998, Halliburton reported $278.8 million in pretax profit. If not for the accounting change, the company would have reported $190.9 million in pretax profit.

Comment: In a statement, Halliburton said it neither admitted nor denied the findings.

Bristol-Myers Squibb Settles SEC Fraud Case

The Wall Street Journal, 8/04 and 05/2004
Bristol-Myers Squibb Company agreed to pay $150 million to settle SEC charges of accounting fraud involving $1.5 billion of inflated revenue from 2000 to 2001. The settlement includes a $100 million civil penalty, the second largest levied by the SEC against a company and one the SEC described as a “stiff civil sanction” meant to deter Bristol-Myers Squibb and others from engaging in similar actions.

While the settlement resolves the matter for the company, the SEC is expected to eventually file civil charges against some Bristol-Myers Squibb employees individually. The SEC details repeated instances where company officials knew of and perpetuated the accounting fraud.

While the company has admitted its accounting was inappropriate, a grand jury will determine whether the overstatements constituted criminal acts by either the company or individuals.

The company also noted that in the settlement, it hadn’t admitted “any liability.”

Comment: It seems like “improper accounting” or “inappropriate accounting” charges are not diminishing but continue to surface in previously respected companies. Stern action needs to be made other than paying multiple million dollar fines with no admission of wrong doing.

SEC Looks Into Krispy Kreme Practices

The Wall Street Journal, 07/20/2004
Krispy Kreme Doughnuts, Inc. said the SEC launched an informal inquiry of its franchise purchases and a profit warning. They have faced questions since going public in 2000 about its accounting transparency and potential for conflicts on interest in investments that its executives made in its franchises.

The company paid $67.5 million in June 2003 to acquire the expansion rights and six stores from franchisees that partly owned by a former officer and director of Krispy Kreme. It bought five other stores and the franchise for certain markets for $33 million in March 2003.

Krispy Kreme didn’t disclose that one of the sellers of the 33 percent stake in the northern California franchise it bought for $16.8 million in January was Mr. Livengood’s ex-wife, whose share was valued at about $1.5 million. Mr. Livengood is the chairman, president, and CEO. The Wall Street Journal, 07/20/2004

Comment: Those transactions sound like a pretty “sweet” deal to me. They “dough nut” sound like good business practices. Their eyes may have been “glazed” over when these were completed.

By Roger Eigsti
Board President,
Institute for Business, Technology, and Ethics