Human Capital & Careers

Apollo Cites Misconduct by Ex-Officers

Findings could affect financial statements and tax reports.
Stephen TaubDecember 15, 2006

Apollo Group has announced that a seven-month probe by a special committee of outside directors found that certain former officers took steps that may have been intended to mask failures in the stock-option-grant approval process. Further, the potential cover-up involves the company’s financial reporting and payment of taxes.

The company stressed that none of these findings apply to any member of its current executive team. The announcement was part of a final report from the committee investigating the company’s stock-option practices, whose conclusions were “largely consistent with earlier, interim factual findings.”

“We remain committed to resolving our accounting issues as quickly as possible,” said Apollo president Brian Mueller in a statement. “These issues are coming to light under my watch, and I assure you that our current management team will settle for nothing less than full and timely disclosure and resolution of all outstanding issues.” Mueller was appointed president of Apollo in January.

The for-profit education company once again said it expects to restate certain previously filed financial statements, but is still unable to determine the magnitude of the revision. The company noted that its accounting for particular stock-option grants did not correctly apply certain accounting requirements. For example, in some instances, the company used a measurement date for option awards that corresponded with the reported grant date even though the approvals for those grants were not obtained until after the reported grant date. Furthermore, the final list of grantees and award amounts was incomplete at the time of the reported grant date for these same options.

Apollo also said it misapplied a certain provision of the Internal Revenue Code related to the contemporaneous tax treatment of certain stock-option grants and may face significant tax liability for prior years. As a result, the company said it prepared and maintained inaccurate documentation concerning the date grant-award lists were completed and approved.

“The Special Committee has found no direct evidence that the grant date for any of the large management grants was selected with the benefit of hindsight,” noted the company announcement. In two instances, however, the price on the grant date was at a relative low point for the company’s stock, and “there is little contemporaneous evidence” to establish that the grant was made on the grant date. In another instance, there is evidence that raises questions about whether a grant award was retroactively selected by a day, the company said. “While there is a possibility that the grant date was retroactively selected on these occasions, there is insufficient evidence to reach such a conclusion,” it added.

Apollo also announced that John R. Norton resigned as chair of the compensation committee, and that K. Sue Redman was appointed to the board, as well as to the audit and compensation committees. Currently Redman is senior vice president and chief financial officer of Texas A&M University. She replaces Hedy F. Govenar as a member of the special committee. The company explained that the change in board membership was prompted by a recent order by a federal district court in Arizona, where three shareholder derivative suits filed against the company are pending. The suits were filed after the formation of the special committee.

In an unrelated matter, Apollo said that in a review of its actual write-off experience from fiscal years 2000 through 2006 relating to accounts receivable, its allowance for doubtful accounts was understated as of August 31, 2006. As a result, it expects to record a pretax, noncash increase in the allowance for doubtful accounts and the associated bad-debt expense of about $34 million. The company added that a significant portion of this amount relates to years prior to 2006.

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