Magazine

Corporate Probes: A Scorecard


Lately, you can't open a newspaper without reading about the Securities & Exchange Commission launching a new investigation of another company or industry. From Enron to Edison Schools, from hedge funds to Wall Street analysts, the list of players under SEC scrutiny just keeps growing. Indeed, with 64 accounting and financial-reporting cases opened in the first quarter alone--more than double the year-earlier total--following all the action is a full-time job. To make things easier, here's a scorecard on the players and the issues under investigation:

ACCOUNTING

ARTHUR ANDERSEN

-- Destruction of documents relating to its audits of Enron and allegations of shortcomings in its audits of Enron, Global Crossing, Qwest, and WorldCom. Criminal trial under way on obstruction of justice. Andersen denies wrongdoing.

DELOITTE & TOUCHE

-- Deloitte's audits of Adelphia Communications and its failure to tell Adelphia's audit committee that the founding Rigas family used company credit lines to buy Adelphia stock. Deloitte says it met professional standards.

ERNST & YOUNG

-- Marketing agreement to sell software with PeopleSoft, an auditing client, may violate auditor independence rules. The SEC wants E&Y to give back PeopleSoft audit fees paid between 1994-2000. E&Y is fighting the charge. The SEC is also scrutinizing the firm's audits of companies such as Computer Associates and PNC Financial Services.

KPMG

-- KPMG's failure to catch alleged revenue-inflating maneuvers by Xerox, an audit client. KPMG denies wrongdoing. Also, the accounting firm's $25 million investment in the AIM mutual fund, an audit client, allegedly in violation of auditor independence rules. Without admitting fault, KPMG agreed to take steps to avoid future investments in audit clients.

PRICEWATERHOUSE COOPERS

-- PwC's audits of MicroStrategy, which settled SEC charges of financial fraud in 2001 for overstating revenues without ad- mitting fault, are still under investigation.

ENERGY

CMS ENERGY

-- Round-trip trades with other energy wholesalers that allegedly overstated revenues by $1 billion in 2000 and $4.2 billion in 2001. The Justice Dept., Commodity Futures Trading Commission, and the Federal Energy Regulatory Commission are also investigating.

DYNEGY

-- Round-trip trades that allegedly inflated revenues. Also, a natural gas transaction that allegedly made cash flow from operations appear larger than it was.

ENRON

-- Widespread alleged abuses of accounting and disclosure rules to inflate profits. Ongoing probes by the SEC and a Justice Dept. task force.

HALLIBURTON

-- Accounting policies that treated cost overruns on construction jobs as revenue, regardless of whether its customers agreed to pay part of the overbudget costs. Halliburton says it stands by its accounting.

RELIANT RESOURCES

-- The energy trader's restatement of earnings for two quarters in 2001 after it determined that some derivative transactions accounted for as cash-flow hedges should have been valued at the market price.

SOFTWARE

COMPUTER ASSOCIATES

-- Overstating revenues in 1998 that allegedly inflated its stock price just before and after the awarding of $1 billion in stock to three top managers. Ongoing SEC and Justice Dept. investigations.

NETWORK ASSOCIATES

-- Alleged accounting inaccuracies that may have understated expenses or overstated revenues in 1998-2000.

TELECOM

GLOBAL CROSSING

-- Capacity swaps allegedly done with other carriers for the purpose of inflating revenues. Ongoing SEC and Justice Dept. investigations.

LUCENT TECHNOLOGIES

-- Booked $679 million in revenue from sales to its distributors before the distributors were able to actually sell the products.

QWEST COMMUNICATIONS

-- Capacity swaps with other carriers as well as equipment sales to customers in return for Internet services, both allegedly designed to inflate revenues.

WORLDCOM

-- Accounting practices, including treatment of goodwill, and company loans totaling $408.2 million to former CEO Bernard Ebbers. WorldCom defends its accounting.

WALL STREET

CREDIT SUISSE FIRST BOSTON

-- CSFB's allocation, as lead underwriter, of shares of hot IPOs to customers in return for allegedly excessive commissions on other trades. Similar practices alleged at J.P. Morgan Chase, Morgan Stanley Dean Witter, Goldman Sachs, and other investment banks under investigation. CSFB agreed to pay a $100 million fine to the National Association of Securities Dealers and to change how it allocates IPO shares, without admitting fault. The others are cooperating with the probe.

HEDGE FUNDS

-- Incidents of fraud, conflicts of interest at firms that manage both hedge funds and mutual funds. The SEC is considering the need for regulation.

iCAPITAL MARKETS

-- Alleged illegal trades that iCapital, formerly Datek Securities, made for its own account through Nasdaq's small-order execution system from 1993-1998. Investigation settled after iCapital Markets agreed to pay a $6.3 million fine, without admitting fault.

MERRILL LYNCH

-- Alleged conflicts of interest for research analysts who work alongside investment bankers. Merrill agreed to pay $100 million in a May 21 settlement with New York Attorney General Eliot Spitzer without admitting wrongdoing. SEC probe is ongoing. Other brokers, including Morgan Stanley and Goldman Sachs, are also being investigated by the SEC, as well as by state officials.

OTHER INDUSTRIES

ADELPHIA COMMUNICATIONS

-- The cable-TV operator's alleged failure to adequately disclose $5.6 billion in loan guarantees to the family of founder John Rigas. SEC and two grand jury investigations are ongoing.

EDISON SCHOOLS

-- For-profit operator of public schools didn't disclose that nearly half its revenues consisted of funds that school districts paid directly to teachers and vendors. Edison agreed to add a director of internal audit, without admitting fault.

KMART

-- Accounting for vendor discounts and other transactions that allegedly underreported 2001 losses by at least $1.7 billion. SEC probe is ongoing; FBI and Justice are also investigating.

PNC FINANCIAL SERVICES

-- Both the SEC and Federal Reserve are investigating the Pittsburgh bank's accounting treatment of three companies it set up with insurer American International Group to hold corporate loans PNC wanted off its balance sheet.

TRUMP HOTELS

-- Allegedly misleading statements in a 1999 press release that suggested the company's positive results were due to operations rather than a one-time gain. Without admitting or denying guilt, Trump consented to an SEC cease-and-desist order.

WASTE MANAGEMENT

-- Founder and five former top officials allegedly used fraudulent accounting to inflate profits by $1.7 billion between 1992 and 1997. The SEC filed suit in March, charging the ex-execs with falsifying and misrepresenting the company's results. They deny the charges.

XEROX

-- Accelerated recognition of lease and servicing revenues in a scheme that allegedly inflated revenues by $3 billion from 1997-2000. SEC settled with the copier maker in April, imposing a record $10 million fine. Xerox agreed to restate earnings for 1997-2000 and form a panel of its outside directors to review accounting policies and practices without admitting guilt.

Data: Company reports, SEC Filings, SECA By Amy Borrus, with Mike McNamee, in Washington, and Susan Zegel in New York


Soul Searcher
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

 
blog comments powered by Disqus