Pack Mentality? Herdman Follows Pitt Out the Door

Staffing managers at the Securities and Exchange Commission must be working long hours these days.

This weekend, SEC chief accountant Robert Herdman said he would resign immediately. Herdman is the second casualty of the controversy surrounding William Webster’s appointment to head the new Public Company Accounting Oversight Board (PCAOB). On election day, SEC chairman Harvey Pitt offered his resignation to President Bush.

The big question now: Will Webster resign as well? Late last week, the AFL-CIO called for the former FBI and CIA chief to resign from the PCAOB.

Herdman and Pitt reportedly were both in a meeting with Webster when the former CIA and FBI head described a “possible problem” at U.S. Technologies Inc. That publicly traded investment fund has been accused of perpetrating a fraud while Webster served as the company’s audit-committee chairman.

Herdman, a confidante of Pitt, is widely credited with recruiting candidates for the accounting board.

In a letter to Pitt released late Friday, Herdman said he was submitting his resignation “in light of recent events” and pressing business, including implementing accounting changes called for by Congress in its historic corporate-reform bill.

“It has been an honor to serve under your leadership. I regret that we did not accomplish all that we set out to do, but we did accomplish a great deal in a time that while short, was replete with unprecedented challenges,” wrote Herdman.

He added, “The commission must make…important decisions about the implementation of several accounting-related provisions of the Sarbanes-Oxley Act. The objectivity of those decisions will be enhanced if someone other than I functions as the commission’s principal advisor on accounting matters.”

Pitt apparently did not try to dissuade Herdman from quitting the commission. “It is with profound regret that I accepted Robert Herdman’s resignation this afternoon,” the SEC chair said in a statement.

Meanwhile, the Bush Administration said Friday that Pitt would remain at the job until a replacement is found.

White House deputy spokesman Scott McClellan told wire service reporters: “Chairman Pitt indicated he would remain there through the transition period until someone new is appointed to the position. He made that clear.”

Last Wednesday, White House spokesman Ari Fleischer told reporters it could take months to find a replacement for Pitt.

One person who probably won’t take the job is former SEC chairman Richard Breeden. He told reporters last Thursday: “I am very happy right where I am.”

Breeden headed the SEC from 1989 to 1993.

SEC: Most Financial Reports Raise Questions

As the Year of the Corporate Scandal heads into its final weeks, an SEC official dropped a bombshell: A “substantial majority” of the financial statements from the 500 largest companies that the SEC has reviewed have raised questions, according to the Associated Press.

Alan Beller, director of the SEC’s corporation finance division, said the SEC has sent out comment letters to those companies. But “less than a substantial majority” of the companies have replied, Beller reportedly said at a securities regulation conference sponsored by the Practising Law Institute.

Most of the questions raised by the SEC in the comment letters concern accounting and the MD&A (management, discussion, and analysis) section, he reportedly said.

“When the shortcomings are significant, we may ask for amendments,” said Beller. Some companies may only need to fix their future quarterly and annual reports, he added.

Beller also assured that the commission won’t overlook or neglect smaller companies. Such businesses comprise most of the roughly 15,000 publicly traded companies in the United States.

Interestingly, when asked about the negative impact of the Sarbanes-Oxley legislation on small businesses, Beller reportedly acknowledged that a “one-size-fits-all policy” might not be in the best interest of small businesses, and probably best suits the largest companies.

Europeans to Comply with Sarbanes-Oxley

Most of the European companies listed on U.S. exchanges plan to comply with the new Sarbanes-Oxley Act, according to a survey of 50 of the 297 European companies listed in the United States conducted by Citigate Financial Intelligence (CFI).

CFI asked the companies about three specific provisions: CEO-CFO certification of results, creation of an independent audit committee, and elimination of loans to officers and directors.

It also asked whether the European companies intend to adopt the proposal by the New York Stock Exchange and Nasdaq that a majority of corporate board members of listed companies be independent.

The survey found that 39 of 50 European companies (78 percent) intend to comply with the exchanges’ proposal.

The remaining 11 companies had major compliance concerns regarding the new law’s requirements and local regulations. These companies are mainly located in Germany, France, Switzerland, and the Netherlands.

They indicated the following obstacles to compliance:

CEO-CFO certification when the board as a whole must sign off on the results and cannot assign responsibility (four of nine German companies).

CFO certification when the CFO does not sit on the board of directors that certifies the results for the local market, even though the CFO would be legally responsible for them under U.S. law.

The appointment and supervision of auditors.

The creation of an independent audit committee that meets both local and U.S. requirements.

Being able to meet the NYSE’s proposed requirement to have a majority of the board of directors also be independent. Of note: this was a worry for eight of the nine German companies in the survey.

Other concerns from the companies that participated in the survey include:

16 companies (32 percent) said either that there were specific legal issues that would prevent full compliance with the new law or that they needed clarification to determine their companies’ ability to comply. However, each of these 16 companies indicated they would comply fully with the new law if the SEC granted them an exemption to the areas where they believe home-country conflicts exist.

40 percent of the companies expressed a desire that future U.S.-European compliance issues be resolved primarily between the SEC and the European Union, while another 40 percent said they wanted the SEC to resolve these issues between countries and companies individually. The remaining 20 percent recommended both.

“Compliance is not an issue for most European companies,” said John McInerney, senior director at CFI. “European companies are committed to this market and want to comply. In fact, many already do so.”

Short Takes

Global Crossing Ltd. moved Joseph Perrone, formerly executive vice president of finance, to the newly created position of executive vice president of business performance, according to published reports. Perrone, who joined Global Crossing from Arthur Andersen, was reportedly the key person who shaped the accounting practices that ultimately led to investigations by the SEC.

Money flowing into junk bonds topped $1 billion last week, according to AMG Data Services. As a result, total inflows year-to-date are up to $5.7 billion. This is the strongest showing of high-yield bond inflows since the end of August.

Fannie Mae issued $2 billion in new three-year callable benchmark notes. They were priced to yield 2.802 percent, three basis points over the OASF, which is a special yield curve created by Fannie Mae.

Freddie Mac issued $500 million in 30-year reference bonds in a reopening of an existing 6.625 percent issue. The bonds were priced to yield 5.602 percent, or 64.5 basis points over comparable Treasuries.

Gillette Co. filed a shelf registration to issue up $1.3 billion in debt securities. Gillette plans to use the proceeds for debt repayment and general corporate purposes, which may include repurchases of common stock, working capital, capital expenditures, acquisitions, and other business opportunities.

Fitch Ratings downgraded the class B certificates issued from Sears Credit Account Master Trust II to A-plus from AA. The actions affect about $808 million of securities backed by a pool of receivables generated under Sears Roebuck and Co.’s revolving credit products, including the Sears Card and Sears MasterCard program.

On Friday WorldCom filed additional bankruptcy petitions for 43 of its subsidiaries, most of which were effectively inactive and none of which had significant debt, according to the company. The company noted it filed the additional entities to provide them with the same relief under Chapter 11 as its other businesses.

“Today’s filing is a formality,” said WorldCom CFO John Dubel. “We have asked the court for permission to jointly administer these cases under the WorldCom petition.”

Whirlpool Corp. said it might need to contribute up to $200 million to U.S. pension plans during the fourth quarter if year-end plan asset values and interest rates remain unchanged from September 30 levels.