VideoYou don't see an annual report like Global Crossing's every day. But the fallen telecom company has trotted out one that richly details the conflict-of-interest offenses committed by a former accounting executive and scads of internal-control blunders at the company.
According to one of the rarest 10-Ks to come along in recent memory, Joseph Perrone, one time chief accountant and former vice president of Global Crossing, allegedly awarded a contract to a company owned and controlled by his son, Joseph Perrone Jr. This isn't the first time Joe Sr. has stumbled. He was singled out in a government filing for conflicts of interest several years ago.
The annual report recounts that Joe Jr.'s company, Withit.com, was hired to integrate, implement, and co-market a one-way Internet-protocol-based voice extension product that Global Crossing intended to market to the financial services industry. For the services, Global Crossing paid Withit a total of $740,000, including a first installment of $250,000 and another $250,000 in December 2001. The company also shelled out $125,000 for out-of-pocket expenses incurred for equipment bought for the Internet project, plus $115,000 for support and consulting services.
Budgetary constraints and a change in product development strategy nixed the project, and Global Crossing never implemented or marketed the voice-extension offering.
By April 2002, an independent committee of Global Crossing's board revealed that Perrone had influenced the decision to enter into the agreement with Withit, "in a manner the committee deemed inappropriate," the annual report noted. As a result, the board of directors penalized Perrone $325,000 and reassigned him to other duties within Global Crossing.
"Although Mr. Perrone disagreed with the committee's findings ... he paid this amount in full [before he left the company] by consenting to our withholding a portion of quarterly and annual cash bonus payments otherwise due him," noted the filing.
The Global Crossing annual report also pointed out that prior to that relationship, the telecom company subleased about 4,125 square feet of office space in Chicago to Withit for about two years at a monthly rent of about $4,500. In late 2001, Withit owed about $32,000 in back rent, although, the company paid all arrearages in full when the lease terminated in July 2002.
The 10-K also provided a laundry list of internal-control shortcomings identified by Global Crossing's new auditor, Grant Thorton (Anderson had been the company's original auditor). They include:
- Authorization, accounting for and disclosure of certain related party transactions;
- Maintenance of documentation and recordkeeping for certain non-recurring, significant transactions;
- Delays in filing reports with the SEC and staffing of personnel related to SEC reporting;
- Deficiencies with respect to information system security;
- Misapplication of U.S. GAAP, resulting in the restatements described in this annual report on Form 10-K;
- Manual invoicing inaccuracies in the billing departments of certain subsidiaries.
Officials at Grant Thornton deemed the internal-control problems "significant deficiencies" that, in the aggregate, constitute "material weaknesses" under American Institute of Certified Public Accountants standards, according to the 10-K.
But partners at the accounting firm also advised the Global Crossing audit committee that the internal-control deficiencies do not affect Grant Thornton's unqualified report on its consolidated financial statements.
Friedman's CFO Resigns
Friedman's Inc., which is embroiled in an accounting scandal, has named Richard Cartoon CFO. He replaced Victor M. Suglia, who resigned after a leave of absence.
The announcement comes less than a week after Cartoon was named interim financial consultant, about the same time that Bradley Stinn resigned as chief executive.
Last month, the SEC launched a formal investigation of the company related to a lawsuit filed by Capital Factors Inc., against Cosmopolitan Gem Corp. (a former vendor of Friedman's) and a number of other defendants, including Friedman's, Crescent Jewelers and Whitehall Jewelers.
Friedman's officials also announced the company would restate its results back to at least fiscal 2000 based on concerns related to its accounting of bad debt and losses. In addition, the company's auditor, Ernst & Young, withdrew its audit opinions on previously filed annual financial statements.
Cartoon has more than 28 years of financial and strategic experience. For the past two years, he served as executive vice president and CFO of Lodgian, Inc. From 1986 to 1999, Cartoon served as Senior Manager and then Partner with Ernst & Young's Restructuring and Reorganization Group.
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