More than a decade ago, as director of Harken Energy Corp., Bush engaged in practices that seem similar to those for which he now scolds Corporate America. He was a member of Harken's audit committee, for example, at a time when it prematurely booked income on the sale of a subsidiary and overstated profits, errors that the Securities & Exchange Commission forced Harken to correct. He sold a substantial number of shares just eight days before Harken showed a major loss. And he was chronically late in filing his SEC forms.
Sound familiar? Improper revenue recognition is behind many of the recent accounting disasters. And failure to disclose important information to shareholders is one of the President's biggest complaints about today's "see-no-evil" CEOs. "This is an uncomfortable situation for Bush," says University of Texas political scientist Bruce Buchanan. "Innocently or not, there's a similarity to the Enron style of accounting."
Democrats smell a whiff of hypocrisy. "President Bush likes to preach responsibility," says Democratic National Committee Chairman Terence R. McAuliffe. "But when it comes to [his] own records, the motto is: `The buck stops over there."' In his defense, Bush says the SEC dismissed charges of insider trading years ago. "There's no there there," he pronounced in a testy July 8 press conference.
The parallels between the current epidemic of audit failures and Bush's Harken dealings aren't easy to shake off, though. His problem dates from 1986, when he exchanged his stake in Spectrum 7, a floundering oil company, for $600,000 worth of Harken shares. Bush not only joined Harken's board but also sat on its audit committee, where his job was to oversee the preparation of financial statements by none other than Arthur Andersen.
Harken later had problems, too. To raise revenue in June, 1989, it sold a Hawaiian subsidiary, Aloha Petroleum Ltd., to a group of Harken insiders for $12 million. The buyers paid $1 million in cash, and Harken took a note for the remainder. Harken then claimed income of $8 million, even though accounting rules bar recognition of revenue from an IOU unless the noteholder has substantial collateral and the company is "reasonably assured" that the loan will be repaid. The ploy let Harken report a loss of $3.3 million in '89 instead of $12 million.
Less than three months later, Bush sold 212,140 of his Harken shares at $4 a share, reaping nearly $849,000. But Bush's shares probably would not have been valued at $4 had Harken reported the larger loss. The SEC later forced Harken to restate its earnings without the bulk of the Aloha sale proceeds.
Bush's second problem is his inability to put to rest questions of whether he had inside information before he sold. For more than two years, the SEC investigated allegations that Bush had sold shares in June, 1990, knowing that Harken would report a larger-than-normal loss. Two months after he sold, Harken reported a second-quarter loss of $23.2 million. On the news, its shares sank from $3 to $2.38.
Complicating his case, Bush repeatedly failed to file a Form 4, or notice of a stock sale by an insider. It wasn't until March, 1991--34 weeks late--that Bush notified the SEC of his 1990 sale. An internal SEC memo released to the Center for Public Integrity, a watchdog group, says Bush was late reporting four transactions totaling $1.02 million. Luckily for him, the SEC at the time did not prosecute individuals unless they filed late at least six times.
Bush beat the insider-trading rap when his lawyers were able to show that he could not have known the size of Harken's second-quarter '90 loss. And because the market took more than two hours to react to the loss, an SEC economist concluded that the earnings announcement was not a "material" event. But the cloud won't go away.
For one thing, Bush's father was President during most of the probe, and the SEC chairman, Richard C. Breeden, had served as one of his White House lawyers. Moreover, the SEC general counsel at the time of the probe was James E. Doty, who earlier represented George W. when he bought the Texas Rangers ball club. Most of the funds Bush used in that deal came from his Harken share sale. Doty, however, says he recused himself from the inquiry.
It's all much ado about nothing, Bush insists: "In the corporate world, some things aren't exactly black and white when it comes to accounting procedures." Unfortunately for the President, these days that sort of explanation isn't likely to quiet the critics. By Paula Dwyer in Washington