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CFOs: War Could Hurt Growth

Finance chiefs say a six-month war would stall revenues: attacks at home would lead to 8 percent decline. Plus: HealthSouth puts CFO Owens on leave, while SEC reportedly freezes CEO Scrushy's assets. Plus: How much did Merck's finance boss make last year?
Stephen Taub, | US
March 21, 2003

Chief financial officers believe the length of the war with Iraq will have a big impact on their companies' revenue growth.

A short successful war will mean positive revenue growth during the next year, according to the March quarterly "CFO Outlook Survey," conducted by Financial Executives International and Duke University's Fuqua School of Business.

A prolonged war with Iraq, however, would cause revenues to remain flat for the coming 12 months, they said.

And if Iraq retaliates with weapons of mass destruction or large-scale domestic terrorist attacks, revenues would fall sharply, the CFOs added.

Specifically, if the war ends quickly with a minimum of casualties, CFOs said revenues will increase 8 percent in the next 12 months, according to the survey.

But if the war continues for more than six months, the finance chiefs said revenues would remain flat.

And if Iraq retaliates with weapons of mass destruction against U.S. troops or with domestic terrorism, revenues will decrease by 8 percent. In fact, if this is what winds up happening, 76 percent of respondents believe revenues will either be flat or decrease.

An 8 percent drop in corporate revenues would be a huge blow to the U.S. recovery. To put it in perspective, Prof. Campbell R. Harvey of Duke University pointed out: "We haven't seen negative 8 percent sales growth in the last 40 years. This magnitude of reduction in sales revenue could quite possibly lead to a severe economic contraction."

In fact, he noted that during the last five recessions, revenues actually increased.

In any case, due to the war-related uncertainty, about two-thirds of CFOs (67 percent) said they are spending cautiously or holding off all capital investment. "This is a major factor in keeping the economy in limbo," asserted Harvey. "Without more robust capital spending, it is unlikely we will see growth in nonfarm payrolls."

The poll of 186 CFOs took place during the third week of March—just before the United States began bombing Iraq.

In general, CFOs were much more pessimistic in the latest survey than during prior polls.

For example, a record 45 percent of CFOs are less optimistic about the economy, compared with 15 percent last quarter. Forty percent, another high, are less optimistic about their own company, up from 23 percent last quarter.

Operation CFO Replacements
How many people does it take to perform the job of one chief financial officer at Triad Hospitals Inc.?

Apparently at least four.

The Plano, Texas, operator of hospitals and ambulatory surgery centers said that chief financial officer Burke W. Whitman has been called to temporary active duty with the U.S. Marine Corps to participate in the Iraq war.

While he is away, the company's management said Whitman's duties will be performed by a variety of the company's officers, including James D. Shelton, CEO; W. Stephen Love, senior vice president and controller; James R. Bedenbaugh, senior vice president and treasurer; and Laura C. Baldwin, director of finance and investor relations.

"We are proud of Burke and his service to our country at this time," said Shelton. "Triad has built a team with tremendous depth and talent, and we anticipate no significant impact to our day-to-day operations during Burke's absence. We look forward to his early return."

HealthSouth CFO Put on Leave
HealthSouth Corp. said it placed chief financial officer William T. Owens on administrative leave, as well as chairman and chief executive officer Richard M. Scrushy.

The company added the board of directors has begun an immediate search for an interim CFO.

The embattled health-care giant also announced that current director Joel C. Gordon was elected acting chairman of the board. HealthSouth also tapped director Robert P. May to serve as acting CEO.

In addition, the health-care services provider also said its board has established a special investigation committee, presently comprising board member Betsy S. Atkins. According to the company, the committee has begun "a thorough and comprehensive investigation of the conduct charged in the SEC's complaint."

As reported yesterday, Weston Smith, the former chief financial officer of HealthSouth, is reportedly planning to plead guilty to federal charges that he conspired to artificially inflate the health-care company's earnings, and that he falsely certified that the company's financial records were accurate.

In addition, the Securities and Exchange Commission filed separate charges against HealthSouth and Scrushy. The commission claims HealthSouth overstated its earnings by at least $1.4 billion to meet or exceed Wall Street expectations.

According to a Reuters report, the SEC obtained a court order to temporarily freeze "substantially all" of Scrushy's assets.

Meanwhile, HealthSouth continues to face charges of Medicare fraud in Texas.

A spokesman for the U.S. Attorney's office in San Antonio told Dow Jones the litigation is still pending. The case (James J. Devage v. HealthSouth Corp.) alleges the company submitted false claims for certain physical-therapy services provided at its outpatient rehabilitation centers, according to the report.

In May 2001, HealthSouth settled another claim with the Justice Department related to an Alabama suit that alleged Medicare violations. The company paid about $8.2 million and entered a corporate integrity agreement with the government, according to Dow Jones.

Meanwhile, one accounting luminary publicly criticized the role played by Ernst & Young, HealthSouth's auditor.

"You have a $1.4 billion error—and it's the type that's not much more than additions to assets," said Lynn Turner, an accounting professor at Colorado State University and former chief accountant at the SEC, in a separate Dow Jones story. "If you can't find that size of an error, what's the point of having an audit? How can that instill investor confidence?"

In the complaint filed by the SEC, the majority of the improper accounting had to do with capitalizing items as part of property, plant and equipment, noted Dennis Beresford, an accounting professor at the University of Georgia's Tull School of Accounting in Athens, Georgia, in the wire service story. "That's a big part of what happened at WorldCom, too. HealthSouth had $800 million spread over about 10 years. That's a fairly large number."

Beresford, a former senior partner at Ernst & Young, told Dow Jones that it is "irresponsible for people to make allegations without knowing what the facts are." But, he added, "it seems to me an auditor ought to be looking there."

For its part, Ernst & Young noted in a statement that the SEC has charged "HRC's accounting personnel designed the false journal entries to the income statement and balance sheet accounts in a manner calculated to avoid detection by the outside auditors."

Short Takes

"As a practical matter, every single large company that sponsors a defined benefit plan outsources to one degree or another," said Eric Lofgren, global director of the benefits consulting group at Watson Wyatt, in a statement. "And while full outsourcing to a single service provider might make sense for some companies at the smaller end of the spectrum, the fact that only 18 of the largest plan sponsors outsource all of the work to their actuarial provider tells us a few things."