The Treasury Department and the Internal Revenue Service are holding hearings designed to give companies guidance on converting their traditional defined-benefit pension plans into cash-balance plans. But all this talk of converting DB plans to cash-balance plans is already generating plenty of ill will.
A number of employee groups and several legislators have railed against the plan, which addresses the way corporations convert DB plans to cash-balance plans. Critics charge that conversion to cash-balance plans would hurt longtime workers. They point out that the last five years of an employee’s salary are not included in the conversion. And typically employees earn the most money in the last few years of work.
DB plans, which are based on a combination of pay and years with a company, tend to generate substantial benefits for those workers. DB plans do not pay out much to workers who stay with a company for just a few years.
Under a cash-balance pension plan, benefits accrue evenly through an employee’s career. They’re also very portable. Backers of the proposed Treasury plan say cash-balance plans would benefit most employees, who often switch jobs several times in their careers. They also point that with DB plans, 20 percent of employees get 80 percent of plan benefits.
But critics of the move say cash-benefit plans mostly benefit employers, not employees. Yesterday Reps. George Miller (D-Calif.), Bernie Sanders (I-Vt.), and Rahm Emanual (D-Ill.) introduced a bill in the House that would require the Treasury Department to drop its proposal for conversion of traditional plans. The bill would also require managers to offer workers age 40 or older and those with at least 10 years of service at a company the opportunity to decide whether they want to stay in a DB program or switch to a cash-balance plan.
Through much of the 1990s, a number of companies converted to cash-balance plans, drawing opposition from elderly employees who claimed such conversions violated age-discrimination laws. Three years ago, the Treasury Department and the IRS stopped sanctioning the switch to cash-balance plans until rules were put in place to help ease the transition.
Job One at Ford: Change the Accounting
When it discloses first-quarter results next week, management at Ford Motor Co. is also expected to announce that it is about to retool some of its accounting practices. This according to a Financial Times report.
The most dramatic change for Ford: allocating R&D costs to regions when incurred. Up until now, Ford has deferred R&D expenses until vehicles are produced. Reportedly that change is expected to help the automaker shift costs from its U.S. operations to international units. The apparent goal? To help Ford’s loss-making U.S. business break even.
While the new treatment represents a marked shift in practice, it will not likely affect the overall calculation of profits.
Last year Ford’s European profits dropped to $12 million—way down from $266 million the previous year. The car maker lost $559 million in the United States last year, after incurring a massive $2.15 billion loss in 2001.
Analysts say stemming losses in North America is essential if Ford is going to break even this year. Ford’s debt rating, which currently stands two notches above junk, may be lowered if performance targets are not met.
Ford is also attempting to cut 20 percent, or $6 billion, from its administration and marketing spend in the next two years. That’s all part of a $9 billion cost-cutting plan the company launched in the wake of poor auto sales. All told, the company lost $5.4 billion globally in 2001.
SEC Looking into ImClone Taxes
Management at ImClone Systems announced on Wednesday that is has received a request from the Securities and Exchange Commission for information related to the failure of its former CEO (and other executives) to pay taxes on exercised stock options.
In March the company indicated that former CEO Samuel Waksal may have failed to pay income tax on the exercise of stock options. If Waksal did not pay the taxes, ImClone would have to—at a cost of $23.3 million to the company. Waksal and other employees allegedly failed to pay as much as $60 million in state—and possibly federal—income taxes.
Last month ImClone management said the drug-research company would delay the filing of fourth quarter and 2002 earnings reports because of the tax issues. On Wednesday, the company’s management pushed the delay further but didn’t provide a date for the release of its financial reports.
ImClone management has already disclosed that the company will restate financial results going back to 2001. In that year, ImClone posted a loss of $102.2 million, or $1.47 a share, on revenues of $33.2 million.
Slight Rise in Financings
An upturn in new financing activity was reported in the first quarter among the nation’s fastest-growing companies, according to research conducted by PricewaterhouseCoopers.
In the first quarter, 25 percent of fast-growth companies—ranging in size from $5 million to $100 million in revenues—reported obtaining new financing. That’s up three points from the previous quarter, PwC says.
Those companies reporting new loan facilities tended to be about twice the size of nonborrowers ($51.8 million in revenues versus $28.9 million). What’s more, 24 percent of new borrowers are considering restructuring their debt over the next 12 months, PwC found.
“On the surface, this looks like a modest upturn in financing activity, but a big shift is taking place below the waterline,” said Tracy Lefteroff, PwC’s global managing partner for private equity and venture capital. As bank interest rates paid by these companies dropped to an average 4.96 percent—57 basis points below year-ago levels—there has been a 12 point surge in borrowing activity by product-sector companies.
In addition, nearly twice as many companies obtaining new loans plan to explore nontraditional sources of financing—including angel investments and venture capital—in the next 12 months.
Scaring up venture capital could be tough, however. As CFO.com reported this week, venture capitalists are going through a particularly bleak stretch at the moment. Indeed, many VCs are focusing on managing existing businesses rather than funding new ventures. (To find out more, read “The Dry Season.”)
Risk Managers Split on Sarbox
Professional risk managers appear to be at odds about what constitutes effective corporate governance—and the mechanisms for enforcing it.
According to a survey of 115 risk-management executives conducted by Allianz Insurance Co., 39 percent believe Sarbanes-Oxley will have a significant impact on reducing corporate malfeasance. Another 33 percent don’t think the legislation will be effective. Twenty-eight percent aren’t sure which way the coin will drop.
But most risk managers in the survey believe that putting internal mechanisms in place to prevent problems is well worth the effort. A recent report by The Association of Certified Fraud Examiners seems to support that assumption, too. According to the report, organizations lose about 6 percent of their revenue to occupational fraud and abuse. The study also noted that occupational fraud was most commonly detected by a tip from an employee, customer, vendor, or an anonymous source.
But in the Allianz survey, nearly 27 percent of surveyed risk managers said their companies do not have a formal whistle-blower process. An additional 3 percent don’t know if their companies have such a procedure.
They’ll need to have one soon. On April 26, the SEC is expected to issue a final draft implementing provisions of Sarbanes-Oxley requiring all publicly traded companies to set up complaint-notification systems. Shortly thereafter, the commission will likely set an effective date for the new law—a law designed to generate better communication between the rank-and-file and audit-committee members.
One minor problem: as CFO.com reported last month, observers say the current design of the SEC’s complaint-notification system is so vague that they’re not sure how to go about complying with the whistle-blower requirement. (To see how some companies are getting ready for the new whistle-blower regs from the SEC, read “Dial ‘M’ for Malfeasance.”)
More than a third of companies are not prepared to recover from a disruption to their top revenue source, according to a survey of nearly 400 CFOs, treasurers, and risk managers at large companies. The survey—conducted by Financial Executives International, the National Association of Corporate Treasurers, and commercial property and casualty insurer FM Global—also found that 80 percent of companies polled haven’t altered risk-management plans since 9/11.
Property-related hazards, such as fires and natural disasters, continue to pose the greatest threat to revenue sources. Eighty-eight percent of finance executives and 83 percent of risk managers said their companies’ level of preparation to recover from a major disruption to a top revenue source is subpar.