Leadership changes in the SEC's division of corporate finance may also mean less nitpicking over regular filings. Along with the departures from the division of director David Martin and deputy director Michael McAlevey, longtime accounting chief Robert Bayless quietly stepped down in October. Bayless, who was widely considered the second-most powerful person in the agency, vetted companies' regular filings with a rigor that some say led to his being asked to leave. Bayless, however, denies that Pitt asked him to step down, and says "it is premature to discuss my plans or future role, other than to say that I expect to continue to be an active member of the commission's team."
Whether the Seaboard case portends that fewer CFOs will be held individually accountable under Pitt's regime is still unclear, say most experts, as is how aggressively the agency will market such cases to criminal authorities. But a softening in such areas is certainly possible, speculates William McLucas, Richard Walker's predecessor as the SEC's head of enforcement and now a partner at Wilmer, Cutler & Pickering, in Washington, D.C. "The facts remain the same under any chairman," says McLucas. "But the judgment about what constitutes a serious violation of the law and who is responsible may change under the new administration."
Levitt's Hard Line
In theory at least, all this seems a radical shift from the heyday of Arthur Levitt, who took a consistently hard line on accounting shenanigans. "Accounting cases were always a significant part of the agency's inventory," notes McLucas, but "the enforcement division has been quite aggressive" in the past few years. Indeed, in the three years that followed Levitt's famous "numbers game" speech in September 1998 — from October 1, 1998, to September 30, 2001 — the division brought lawsuits against at least 90 companies and 54 CFOs for financial-statement fraud, including such high-profile targets as Sunbeam, McKesson HBOC, and Cendant. Meanwhile, major corporations such as Lucent, Raytheon, and Xerox are among the 250 or so cases still under SEC scrutiny, with probes widening within each firm.
The case load was an ambitious one. Frauds at larger companies tend to be more sophisticated and involve more people than the typical microcap case, which means more resources are required to crack them. Overall, about 60 percent of the companies charged in fiscal 2000 traded on major exchanges at some point.
Since many of the larger companies are multinationals, there was also a more intense focus on improprieties at foreign entities. The ongoing investigation of Xerox, for example, began with accounting problems found in its Mexico operations. Boston Scientific settled with the SEC last year on charges of channel-stuffing in its Japanese division. And several large companies, including IBM, American BankNote, and Chiquita, were hit with large fines for bribing outside parties in other countries. The cases represent a real coup for the SEC, since the amounts were often small ($30,000 in the Chiquita case, $75,000 for Baker Hughes) and hard to detect.
"It's an enormous undertaking to make sure the books and records are proper at that level of detail," notes attorney Greg Bruch, of Washington, D.C.-based Foley & Lardner. Bruch was assistant director at the division until September and worked on several of the cases. The relatively stringent responses arose from the ill intent inherent in a bribe, he says. "You wouldn't see that level of action if it was an improperly recorded invoice [for the same amount] from a real-estate venture in Kansas."
The past several years have also given rise to a growing number of CFOs being held accountable for accounting trouble. About 60 percent of the cases in the last three fiscal years named a CFO as a defendant, up from an average of 43 percent for cases brought between 1987 and 1997. And as CFO reported in September 2000 ("Jailhouse Shock"), more of those CFOs are facing criminal charges. Thanks to joint efforts between the SEC and states' attorneys general, 19 CFOs went to jail or were awaiting sentencing between 1998 and 2000, more than six times the number who did time in the previous four years.
As proof of the agency's new muscle, SEC officials point out that the number of enforcement actions for fraud, which can include multiple filings within a given company, grew from 78 in 1998 to 100 in 2000. This trend follows a rising tide of total securities law violation filings, which increased from slightly more than 400 in 1992 (the year before Levitt took over) to about 500 in 2000.
More Bark than Bite?
But while Pitt is clearly promoting a more conciliatory tone, it's worth questioning how much a change of philosophy will change the life of the average corporate issuer. While Levitt wasn't shy about using his bully pulpit to warn companies about straying from the straight and narrow of GAAP, a closer look at his overall record raises some questions about whether the agency's bite ever lived up to his bark.
On balance, the average company's chances of being slapped with an SEC lawsuit for financial-statement fraud during the Levitt regime hardly increased over previous years. The SEC initiated financial fraud actions involving 29 companies in fiscal 1999, 33 in 2000, and 28 in 2001, according to CFO's analysis of the SEC's litigation releases. These statistics fit smoothly into trends revealed in the 1999 fraud report sponsored by the Committee of Sponsoring Organizations of the Treadway Commission (known as the COSO Report), which found an average 27 companies per year facing penalties for financial-statement fraud between January 1987 and December 1997.
Reader Comments» Post a comment