Sullivan, Yates Plead Not Guilty

As expected, WorldCom's former chief financial officer, Scott Sullivan, and former director of general accounting, Buford Yates, pleaded not guilty to charges that they participated in one of the largest accounting scandals in U.S. history.

Sullivan was released on a personal recognizance bond of $10 million while Yates was released on a personal recognizance bond of $500,000.

Both men were named in a seven-count indictment last week, including one count of securities fraud, conspiracy to commit securities fraud, and fraud in connection with the purchase or sale of securities. They were also charged with three counts of making false filings with the Securities and Exchange Commission.

Prosecutors reportedly said they are continuing their investigation and that more charges are likely.

"The government is continuing its investigation and we do plan to supersede at some point to add charges to the same scheme and potentially to add defendants," U.S. Assistant Attorney David Anders told U.S. District Judge Barbara Jones, according wire services.

WorldCom's ex-controller David Myers is currently negotiating a plea deal. Betty Vinson and Troy Normand, two other WorldCom executives, are also reportedly discussing plea bargains with the government.

Myers, Normand, and Vinson last week were named as unindicted co-conspirators in the WorldCom case.

Management at the now-bankrupt telco has admitted the company misreported $7.2 billion in expenses since 1999.

Before their brief court appearance, Sullivan and Yates shook hands. The two then sat down at opposite ends of the defense table, according to Bloomberg's.

Old College Try: Ex-J.P. Morgan Exec Pleads Guilty in Columbia Scam
In yet another scandal involving a finance executive, a former J.P. Morgan Chase assistant treasurer reportedly pleaded guilty to conspiring with two Columbia University employees to embezzle $4.5 million from the bank.

Jacqueline McTair, 69, apparently admitted using her position at the banking giant to make unauthorized withdrawals from Columbia's accounts.

McTair is said to have pleaded guilty to counts of bank fraud, money laundering and embezzlement.

Under the plea agreement, McTair is expected to receive a 10-year jail term when she is sentenced Dec. 12, according to the report.

Prosecutors charged that McTair, along with Ingrid Rijos and Veronica Bowes, who worked in the university's student-services department, falsified phony slips to make it seem like they deposited $2.5 million. Instead, they kept the money.

McTair allegedly processed the phony documents and deducted the money from Columbia's accounts.

Rijos and Bowes were indicted last month. Their case is continuing.

Another Brick in the Wall: AICPA Urges Reform
The head of the largest industry association for accountants yesterday urged its members to work hard to clean up their reputation.

"What is needed is not just reform of the accounting laws, it is a rejuvenated accounting culture, both internally in corporate finance offices and externally in audit firms," said American Institute of CPAs (AICPA) President and CEO Barry Melancon in a speech made to a forum convened by the Yale Graduate School of Management.

"The culture must build upon the profession's traditional values," said Maelancon. "We are determined to demonstrate that auditors can and indeed do say 'no.' Because only if auditors are fully prepared to say 'no' to management will investors be fully prepared to say 'yes' to the markets."

Melancon noted that the recent accounting scandals have been painful to most auditors and CPAs. He said the vast majority of accountants provide sound, objective judgments and advice.

"But, hundreds of thousands of good 'apples' do not excuse the behavior of a few bad ones," he added. "Make no mistake about it; our profession was part of the problem and it came to embody the public's perception of the problem. Now we intend to be a part of the solution."

Melancon also said that the AICPA, in conjunction with the University of Texas at Austin and the Association of Certified Fraud Examiners, will establish an Institute for Fraud Studies. That Institute will seek to enhance investor education and to examine ways investors can help protect themselves against fraud.

Yesterday, the AICPA also took a few initiatives in the area of fraud detection:

• The institute announced it plans to introduce by next June new anti-fraud criteria and controls intended for public corporations.
  
  

• The industry association also said it is urging stock exchanges to mandate effective anti-fraud training for management, boards of directors, and audit committees and will make available training to directors and other corporate officials free of charge.
  
  

• AICPA is calling on its auditing standards board to enhance existing attestation standards for CPAs to test and report on client anti-fraud controls and criteria and to develop ways to communicate the results to the public.
  
  

• The institute is initiating discussions with the American Accounting Association, the Federation of Schools of Accountancy, university programs, and college textbook authors to find ways to incorporate anti-fraud education in programs and text materials.
  
  

The AICPA also said it is working to achieve more transparent financial reporting by calling on the auditing standards board to revise existing internal control and reporting standards. Those revisions would likely include advising companies to split the positions of chairman of the Board and CEO, and to mandate corporate anti-fraud education and a corporate ethical code of conduct.

The 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.