Risk & Compliance

Instant Karma?

SEC Chairman says accelerated reporting of 10-Ks, Web material, and insider trading will help investors and companies. Elsewhere: Enron cleans hous...
Stephen TaubFebruary 14, 2002

The Securities and Exchange Commission on Wednesday proposed changes to corporate disclosure rules that would speed up the reporting of financials and other important information. As CFO.com reported exclusively in early February, some of the changes involve form 8-K.

“These steps will provide significant improvements quickly while other proposals are considered,” said chairman Harvey Pitt, in a statement. “We anticipate further reform proposals covering financial reporting and disclosure requirements, accounting standard setting, regulation of the auditing process and profession and corporate governance.”

In a separate statement, Pitt asked officials at the New York Stock Exchange and Nasdaq to review corporate governance and listing standards, including officer and director qualifications and the codes of conduct of public companies. “Recent events have underscored the need for public companies to have a strong commitment to full disclosure and compliance with all regulatory regimes to which their companies are subject,” Pitt said in a letter to the chairmen of the NYSE and Nasdaq. “While no set of rules can stop every venal actor determined to put personal interests ahead of those of the companies they manage, we believe that there are a number of ways that current corporate governance standards can be improved to strengthen the resolve of honest managers and the directors who oversee management’s actions.”

Pitt applauded the Big Board for establishing a Special Committee on Corporate Accountability and Listing Standards to examine corporate governance issues, including the possibility of requiring continuing education programs for officers and directors. The Nasdaq is taking similar steps.

Separately, Pitt commended Financial Executives International for reemphasizing its members’ code of ethics and asked FEI to consider whether there is a need to update the code in light of recent developments.

In its plan to improve corporate disclosure, the Commission said it intends to propose a number of new rules. The changes include:

  • Expanding the list of material events that trigger the filing of an 8-K.

The plumped-up list will include such items as changes in rating agency decisions; transactions in the company’s securities, including derivative securities, with executive officers and directors; departure of the company’s CEO, CFO, COO or president (or titles of equivalent rank); offerings of equity securities not included in a prospectus filed by the company with the Commission; and notices that reliance on a prior audit is no longer permissible, or that the auditor will not consent to use of its report in a Securities Act filing.

  • Requiring companies to file their 10-K forms within 60 days after the end of their fiscal year, rather than the current 90 days.
  • Requiring companies to file their quarterly 10-Q reports within 30 days after the end of their first three fiscal quarters, rather than the existing deadline of 45 days.
  • Accelerating reporting by companies of transactions by company insiders in company securities, including transactions with the company.

Currently, trades must be reported by the tenth day of the month following the month in which the trades occur. That means investors can wait as long as 40 days to learn this information, which the commission called “inadequate for today’s markets.” The Commission said it plans to propose that companies disclose on a current basis significant transactions in the company’s stock by their officers and directors.

  • Ensuring that companies post reports on their web sites at the same time they are filed with the SEC.
  • Require disclosure of critical accounting policies in Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in annual reports.

“Investors can be confident in the systems as we continue to work to improve it,” Pitt proclaimed. “”Our financial disclosure system is the best in the world.” Recent events would seem to indicate otherwise.

KPMG’s Butler: Big Gap In GAAP

Harvey Pitt isn’t the only one who thinks the accounting world needs a swift shakeup. KPMG Chairman Stephen Butler told reporters the entire U.S. accounting system is an obsolete relic that needs a complete overhaul to restore investor confidence.

“With today’s standards, it’s all too easy to hide certain assets, liabilities and expenses, and to recognize earnings based on guesses about, for example, future commodity prices,” he told Reuters.

Butler said U.S. accounting rules were designed for the industrial age, not the current service economy. “GAAP (generally accepted accounting principles) does not do a very good job of describing any modern company,” he said. But Butler did warn that a quick fix would not prevent “future Enrons” and would be tantamount to “pouring concrete around an already obsolete accounting and auditing model.”

Butler, who is set to retire in November, recommended that companies issue real-time financial information to investors, taking Pitt’s proposals a few steps further. Butler’s plan would require real-time auditing “based on error prevention rather than after-the-fact-detection,” he said.

Butler believes his plan would lessen investors’ obsession with quarterly results and put less pressure on management to meet widely anticipated expectations.

The New Enron?

Despite the turmoil surrounding the company’s current and former executives, Enron Corp. is desperately trying to emerge from bankruptcy as a viable operation. In addition, it appears the company’s new management is trying real hard to distance itself from the old management.

Late Tuesday, Enron management said that six directors — including four on the board audit committee — were resigning from the company. The following day, Martin Bienenstock, an attorney who represents the energy trading specialist, said during a hearing at U.S. Bankruptcy Court of the Southern District of New York that he believes all Enron executives cited in the recent Powers report have been “terminated,” according to Dow Jones. This includes Rick Buy, chief risk officer, and Rick Causey, the chief accounting officer, added the wire service, citing Bienenstock.

The two Ricks were accused of inadequately supervising off-balance-sheet transactions. Both of them invoked the Fifth Amendment at Congressional hearings last week. According to the report, none of the fired executives will receive severance packages.

Lay’s Cottage Industry

As anyone who’s studied free-market capitalism know, selling an illiquid asset in a hurry usually leads to an extremely low price.

This law of financial physics, also known as the fire sale theorem, seems to apply to everyone in the known galaxy — except Kenneth Lay. Enron’s former CEO recently sold a cottage in Aspen — one of the Lay’s four Aspen properties — for $10 million. According to published reports, the price was easily the highest amount per square foot ever paid in the Aspen area for a house.

The Lays paid $1.9 million in 1991 for the 3,015-square-foot house, which sits on a three-acre lot. The new (and still anonymous) owners paid roughly $3,330 a square foot, according to a report citing the warranty deed made public Tuesday. “The highest price any home has ever sold here before is around $1,260 a square foot,” real estate broker Heidi Houston told Reuters.

Now, the big question is, who cashed out the Lays at such a huge multiple over comps?

Accounting Short Takes

Calpine Corp. amended its September 30, 2001 quarterly report to include supplemental disclosures. The company said these disclosures do not change the earnings, balance sheet or cash flow results previously reported. They do, however, provide updates and elaborations to certain notes to the financial statements and other items of current interest.

Calpine’s amended filing came in response to a comment letter it received from the SEC’s Division of Corporation Finance and reflects subsequent discussions between Calpine and the SEC staff, company management said.

— Management at Homestore.com Inc. on Wednesday said it will restate financial results for 2000 and expects to file new figures by mid-March after it concludes an internal accounting inquiry. The company said the accounting issues are not related to its ongoing operations.

Homestore had already said it intends to restate results for the first, second and third quarters of 2001 as part of an ongoing inquiry by the board of directors’ audit committee into historical accounting practices.

As a result of the restatement announcement, Nasdaq changed the status of its trading halt of HomeStore.com Inc.’s shares to a request for additional information. Trading in Homestore shares was halted early Wednesday morning for news pending when the stock was trading for 72 cents a pop. The stock has traded as high as $37.25 over the last year.

— British telecommunications group Cable & Wireless, whose share price has plunged over the past two days, Wednesday defended its accounting treatment of capacity sales to and from other carriers. In a statement, C&W management said the accounting practices were “part of its normal commercial activities.” The statement added: “Capacity sales are only treated as such where cash consideration passes and are separately reported in the company’s published accounts.” The statement was further proof that entire planet now has accounting on the brain.

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