Video"The Staff advised the company that it would recommend that the SEC seek civil penalties and enjoin the companies and the individuals from future violations," Aura said in its filing. "In addition, the SEC staff would recommend that the SEC impose director and officer bars against Messrs. Kurtzman and Veen and a bar against Veen to prohibit his practicing as an accountant before the SEC."
Aura also said its Audit Committee will conduct a full review of the company's accounting controls and procedures.
And finally, KCS Energy Inc. said it is restating its 2001 quarterly financial statements after its outside auditors said that their earlier advice regarding the company's treatment of the adoption of SFAS 133--Accounting for Derivative Instruments--was incorrect.
Upon adoption of SFAS No. 133 on January 1, 2001, the company said it recorded a liability of $43.8 million representing the fair market value of its derivative instruments. All of its derivative instruments that existed at January 1, 2001 were scheduled to expire during the first quarter of 2001 or were terminated in connection with the company's emergence from Chapter 11 in February 2001, the company explained. KCS elected not to designate its existing derivatives as hedges and reported the $43.8 million ($28.5 million after-tax) currently through earnings, as a cumulative effect of an accounting change.
"The outside auditors now believe that the company's initial adoption of SFAS No. 133 was incorrectly reported through earnings as a traditional cumulative- effect type component of net income at January 1, 2001," the company said in a statement. "Rather, the outside auditors have advised the company that their current view is that SFAS No. 133 requires the company's derivative instruments that had been designated as cash flow hedges under accounting principles generally accepted prior to the initial application of SFAS No. 133 continue to be accounted for as cash flow hedges with a transition adjustment reported as a cumulative- effect-type adjustment to accumulated other comprehensive income, a component of stockholders' equity, and not recognized currently through earnings.
Under the provisions of SFAS No. 133, if a derivative instrument accounted for as a flow hedge is sold, terminated or exercised, the net gain or loss shall remain in accumulated other comprehensive income and be reclassified into earnings in the same period or periods during which the hedged anticipated transaction affects earnings, the company explained. "Accordingly, even though all of the company's derivatives that existed at January 1, 2001 either expired or were terminated during the first quarter of 2001, accumulated other comprehensive income will be reclassified into earnings over the original term of the derivative instruments, which extended through August 2005."
Downgrades Trounced Upgrades in 2001
Moody's Investors Service said that rating downgrades nearly tripled upgrades for US corporations in 2001.
This marked the fourth year in a row in which US corporate rating downgrades outpaced upgrades. It also was the steepest decline in corporate credit worth since 1991.
The reason for this trend: Rapid increases in corporate debt growth and overly optimistic profit forecasts in the late 1990s coupled with a steep slide in corporate earnings in 2001 as well as special events such as the terrorist attacks, says Moody's.
"Moody's expects that the deterioration in US corporate credit quality will begin to ease next year, although, rating reviews and rating outlooks hint that rating downgrades will again lead upgrades in 2002," it says in a press release.
The rating agency adds that a modest rebound in corporate cash flow, slower debt growth, and declining interest expense should create a more favorable credit environment in 2002. It says that improvement will likely be limited by excess global capacity and a possible increase in borrowing costs in the second half of the year.
Specifically, through December 17, Moody's says that ratings of 616 corporations were downgraded in 2001, affecting $825 billion of debt. Ratings of 214 corporations were upgraded, affecting $412 billion of debt.
Moody's says the industries that suffered the most downgrades were the airlines, high-tech, manufacturing, and utilities sectors, which were negatively affected by excess capacity, but also special events including the California energy crisis, and the September 11 terrorist attacks.
In the speculative-grade sector, Moody's says that downgrades exceeded upgrades by a factor of 3.6-to-1 last year, versus 2.2-to-1 among investment-grade credits.
On the positive side, Moody's says credit quality strengthened among US banks and financial institutions, which experienced 54 upgrades on $261 billion of debt versus 36 downgrades affecting $47 billion of debt. "Good core earnings and greater revenue diversity enabled financial institutions to withstand weaker asset quality and economic shocks without having to cut back on credit availability," Moody's says in its press release. "The health of financial institutions could well be the crucial factor distancing the US economy from a broad credit crunch."
The credit quality of corporations and governments outside the US did not suffer as badly.
Downgrades outnumbered upgrades by a margin of more than two-to-one, the rating agency says. "This represents a turnaround from 2000, when rating upgrades exceeded downgrades by a more than two-to-one margin outside the US," it adds.
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