VideoThe AICPA indicated it is initiating a debate within the accounting community on how to differentiate between the needs of large and small companies, and how to reform GAAP to reflect this reality. In addition, the industry group said it is increasing its dialogue with the Financial Accounting Standards Board to encourage the development of an improved reporting model that will provide investors with higher-quality information.
Beyond that, the AICPA announced it is developing new guidance regarding an auditor's potential dependency on fees from large clients, including discussion with audit committees about potential dependency and expanded rotation requirements for key personnel. The guidance would also consider compensation policies that reward partners primarily based on auditing proficiencies, and policies that prevent a firm from penalizing a partner who says "no" at the risk of losing a client.
"We realize that no single initiative will rebuild investor confidence; no single magic bullet will put fraud or malfeasance to rest," conceded Melancon. "The path toward restoring investor confidence is a long one. It must be put in place brick by brick."
(Editor's note: To find out more about the new rules of engagement for auditors, read "No More Mr. Nice Guy," the cover story for the September issue of CFO.)
Dunlap, Former CFO Settle Charges
Former Sunbeam Corp. Chairman and CEO Al Dunlap and former CFO Russell Kersh settled charges by the Securities and Exchange Commission in U.S. District Court for the Southern District of Florida. They SEC had charged that the two employed improper accounting techniques and undisclosed non-recurring transactions to misrepresent Sunbeam's results of operations.
Under the agreement, Dunlap will pay a civil penalty of $500,000 and Kersh will shell out $200,000. They also agreed to be permanently barred from serving as officers or directors of a public company.
As a result of the two executives' actions, "Sunbeam's financial statements and press releases reporting 1996 year-end results, quarterly and year-end 1997 results, and first- quarter 1998 results were materially false and misleading," the SEC charged.
According to the Commission, the illegal conduct began at year-end 1996 with the creation by Kersh and others of inappropriate accounting reserves. The reserves increased Sunbeam's reported loss for 1996. "These 'cookie-jar' reserves were then used to inflate income in 1997, thus contributing to the false picture of a rapid turnaround in Sunbeam's financial performance," the Commission charged.
In addition, to further boost income in 1997, Dunlap, Kersh and others led Sunbeam to recognize revenue for sales, including "bill and hold sales," that did not meet applicable accounting rules. As a result, for fiscal 1997, at least $60 million of Sunbeam's reported $189 million in earnings from continuing operations (before income taxes) came from accounting fraud.
Around this same time, the SEC says Dunlap, Kersh and others failed to disclose that Sunbeam's 1997 revenue growth was, in part, achieved at the expense of future results. The Commission asserted that Sunbeam had offered discounts and other inducements to customers to sell merchandise immediately that otherwise would have been sold in later periods -- also known as "channel stuffing."
Sunbeam's improper accounting and channel stuffing in 1997 created the prospect of diminished results in 1998, the SEC alleged. In early 1998, Dunlap, Kersh and others apparently took increasingly desperate measures to conceal the company's mounting financial problems.
They again caused Sunbeam to recognize revenue for sales that did not meet the applicable accounting rules and to engage in acceleration of sales from later periods. What's more, the SEC says the two misrepresented (or caused the company to misrepresent) Sunbeam's performance and future prospects in its filing for the first quarter of 1998, its offering materials in connection with a bond offering, and in communications with analysts.
While consenting to the final judgment, Dunlap and Kersh neither admitted to or denied the charges in the SEC's suit.
Short Take: New CFO for Soros
Abbas "Eddy" Zuaiter has been named new chief financial officer for Soros Fund Management, which manages more than $10 billion in hedge funds, according to published reports. He will join the firm on Oct. 1.
Zuaiter replaces Sean Cullinan, who recently left Soros to join Duquesne Capital Management, which is run by Stanley Druckenmiller, who was once Soros' key triggerman.
Zuaiter had been with PricewaterhouseCoopers since 1989, most recently a partner in the Alternative Investment Management Group.
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