And they were so close to landing this thing.
Just when it seemed like American Airlines had found a way to avert bankruptcy, union leaders over the weekend threatened to nix critical wage concessions granted a few days earlier.
The reason for the reversal? According to published reports, the unions found out about the executive perks of American’s top executives — perks the unions say were kept secret during contract negotiation.
The labor unions had agreed to $1.8 billion in pay and benefit cuts to avert a bankruptcy filing. But a day after agreeing to the give-backs, American filed its annual report with the Securities and Exchange Commission. On Friday, leaders of unions representing the airline’s ground workers and mechanics threatened not to sign the agreements. On Saturday, Reuters reported that the flight attendants union called for a new vote, contending that the executive-perks revelation put the deal in a whole new light.
The annual report revealed that American funded a supplemental pension trust for its top 45 employees that would protect a portion of their retirement income if the airline were forced to file Chapter 11. In addition, the airline offered its top six executives bonuses of twice their base salaries as incentive to stay with the airline through January 2005.
Not surprisingly, American’s labor leaders were outraged at the information. “We have signed no new agreement, and in light of the disclosure of American Airlines’ SEC filing, we must reconsider whether we will sign off, even if the consequence is bankruptcy,” James C. Little, a director of the Transport Workers Union, which represents mechanics and ground workers, said in a memo to members.
According to the Washington Post, American spokesman Bruce Hicks said no union officials have told American they were backing out of the deals. “If they did, that would be tragic,” Hicks told the newspapers.
But John Darrah, president of the Allied Pilots Association, told the Post that his members were “justifiably irate” with the perks and that “every employee on the property should question management’s motives and judgments.”
Flight attendants were equally upset with the revelation. Said John Ward, president of the flight attendants union: “The only responsible course of action for the company to take at this time, if it has any sense of decency and any hope of restoring any level of trust from flight attendants, is for this money grab to be rescinded immediately.”
Ward also questioned the timing of American’s SEC filing, noting that American had asked for an extension during negotiations with unions. “Knowledge of this outrage would probably have doomed any agreement, and rightly so,” he said.
American’s Hicks denied the accusation, however, telling the Post it filed late simply because the company didn’t know whether or not it would file for bankruptcy.
He added that chairman and chief executive Donald J. Carty took an 88-percent cut in total compensation in 2001, and that he agreed to cut his salary this year by 33 percent.
Meanwhile, though the flight attendants union asked for a revote, other unions are hesitant, fearing a knee-jerk reaction to the revelation. In fact the president of the pilots’ union said he was caught off guard by the flight attendants’ decision.
“I think if you took a revote right now, it would be an emotional vote and not an intellectual vote,” Darrah, told the Associated Press.
Baruch College Accounting Professor Named PCAOB Chief Auditor
Apparently, every watchdog has its day.
Take Douglas Carmichael, the accounting scholar known for his harsh criticism of the accounting industry’s lax standards. Late last week, Carmichael was named chief auditor of the Public Company Accounting Oversight Board.
Carmichael, currently director of Baruch College’s Center for Intergrity in Financial Reporting, told Bloomberg he viewed the job as a chance to address shortcomings in the accounting field.
“I’ve seen things happen in the auditing profession that have disturbed me, that I thought went in the wrong direction,” he told the news service, “and the chance to put things in the right direction was the appeal of the job.”
After a slow start (including the initial selection — and subsequent resignation — of William Webster as chief), the PCAOB seems to be off and running. Last week’s selection of William J. McDonough as chairman was met with almost universal praise.. And as CFO.com reported earlier, the PCAOB has hit the ground running, with plans to write new audit-firm rules, collect fees from public companies for funding, and revisit the issue of banning auditors from doing tax work for clients.
EU Fights Back on Registration Requirements
One sure sign the PCAOB is in full gear: regulators in other countries are already mad at it.
The European Union promised to fight back if the U.S. requires European accountancies to register with the new U.S. accounting watchdog, reports AccountingWeb. In an April 14 letter to SEC chief William Donaldson, EU financial services commissioner Frits Bolkestein said if the PCAOB goes ahead with the proposed rule, the EU would require U.S. companies to register with all 15 EU member nations.
No word on whether Bolkestein concluded the letter with “So there.”
As you know, the PCAOB in March voted unanimously in favor of requiring both U.S. and non-U.S. corporations to register with the board. The idea is to toughen U.S. auditing standards and is a key component of the Sarbanes-Oxley Act.
In his letter to Donaldson, however, Bolkestein argued that the controversial rule would pose an unnecessary burden on European accountancies that audit U.S. public companies, according to AccountingWeb. The EU contends that European firms don’t need to register with the PCAOB because they are already using stricter accounting rules, which were enacted in the 1980s.
Moreover, the EU argues that the U.S. rules could conflict with European rules and laws.
So far, it’s unclear what action the PCAOB will take in response to Bokestein’s letter.
Gemstar-TV Guide Cut Off Ex-CEO, Ex-CFO
One day after the SEC sought to jail the former chairman of Gemstar-TV Guide International Inc. for not cooperating with its investigation, the company removed him and his number two from the company payroll. This, according to published reports.
Company management said on Friday that Henry Yuen, Gemstar’s former CEO, and Elsie Leung, the media giant’s former finance chief, were “fired” for failing to cooperate with an SEC investigation into the company’s accounting practices.
The two had already stepped down from top management in November after accounting irregularities came to light. But they had remained on the company payroll.
Last week, the SEC asked a federal court in Los Angeles to hold Yuen in contempt for violating a court order to testify in the agency’s investigation. The SEC, which launched the Gemstar probe in October, asked the court to jail Yuen and fine him $50,000 a day and to double the penalty daily until he showed up in court.
According to the Los Angeles Times, Yuen’s lawyer, Stanley Arkin, said Yuen had asked to postpone his court appearance because of unspecified “pressing issues” with Gemstar.
The latest developments don’t bode well for the pair’s fight to get their severance payments. As CFO.com reported earlier, Yuen and Leung sued the SEC in March, accusing the agency of illegally freezing their severance payments by threatening to sanction Gemstar. On Monday, a federal judge in Los Angeles is set to consider their request release the funds.
When they stepped down in November, the agreement provided for Yuen and Leung to receive the money May 6, said the L.A. Times. The deal also included a condition that the two must cooperate with an internal audit investigation, as well as with the SEC. In addition, the agreement called for all patents and inventions developed by Yuen to be transferred to the company.
But sources close to the company told the Times that the two executives breached their new employment agreements by failing to cooperate with the SEC and the internal audit.
Now, it looks more as if Gemstar or the SEC might stop severance payments, the newspaper reported. In addition, the SEC could seize the payments if it finds that the two executives improperly inflated Gemstar revenue.
The audit was finished earlier this month, showing a loss of more than $6 billion for 2002 because of goodwill write-downs. Gemstar restated its results for 2000 on.
CEO Says Bess Eaton Wanted Less Dough
From our Now-We’ve-Heard-Everything Department: A Rhode Island ex-CEO says his former employer fired him for failing to deflate earnings.
George Cioe, former president and CEO of a Westerly, R.I.-based donut chain, is suing for wrongful termination, according to the Associated Press. Cioe claims Bess Eaton Donut Flour Co. Inc. fired him for refusing to perform illegal business practices. Cioe also claims he get the ax because he fired CFO Paul Gencarelli — who happened to be the owner’s son.
The lawsuit claims Cioe dismissed the CFO because he believed he was stealing from the company and lying to his father, Bess Eaton chairman and sole owner Louis Gencarelli. Among the illegal acts Cioe claims he refused to perform: deflating earnings to avoid taxes.
The lawsuit claims that the elder Gencarelli wanted Cioe to fudge expenses to give Bess Eaton a loss $1.7 million last year, instead of a profit of $144,000.
Apparently, the alleged understatement would have saved Gencarelli $700,000 in personal taxes.
Meanwhile, the company has thrown its own accusations back at Cioe, also fraud-related, saying he submitted deceptive financial statements to potential lenders.
This is pretty serious stuff, particularly coming from a company known for printing biblical verses on its paper coffee cups.
It’s Patriots Day — that’s Bostonian for “Marathon Day.” This year, at least two finance execs will be running the 26.2 torturous miles of the Boston Marathon.
- Ken Vendley, president of Soundview, Calif.-based Market 1, a marketing-services company. Vendly was CFO of the company before he became president in 2000.
- Mike Gonnerman, founder of a financial-services consultancy for tech companies. With 12 years of CFO experience at four companies, Sudbury, Mass.-based Gonnerman offers interim-CFO work as part of his menu of services. He’s trained for — and run in — eight marathons so far. Apparently, Gonnerman’s day has more than the standard 24-hours in it.