Risk & Compliance

Companies Not Prepared for Interruptions, Say CFOs

In case of emergency -- who knows? Also: McMahon steps down at Enron, and SEC staffs up its corporation finance division.
Stephen TaubApril 22, 2002

Is your company prepared for a disruption to its major source of earnings? If not, you’re not alone.

More than 50 percent of finance executives say their companies are not well prepared for an interruption to their businesses. And around 25 percent concede their contingency plans are not adequate.

These are some of the findings of a poll of 200 chief financial officers, treasurers, and risk managers conducted by property-and-casualty insurer FM Global, the National Association of Corporate Treasurers, and management-consulting firm Sherbrooke Partners. More than 75 percent of the respondents indicated that a major disruption would have a dramatic impact on their companies’ earnings—or threaten their business continuity.

According to the study, respondents are most worried about property-related hazards—things like natural disasters, fires/explosions, terrorism/sabotage/theft, mechanical/electrical breakdowns, and service disruption. They’re not as concerned about casualty-related risks (such as product tampering and political risk).

The study also reveals a fairly sizable disconnect between finance managers and their superiors in assessing the potential damage stemming from a business interruption. More than one-third of the respondents, for instance, believe their companies’ senior management team lacks a complete understanding of what would happen to their companies’ earnings and shareholder value if an interruption occurred. That group also said their bosses don’t even know what would be covered by insurance in case of a business interruption.

The survey also shows a substantial difference in what risk managers and finance executives think about their companies’ contingency plans. “CFOs and treasurers say they are less confident in their company’s contingency planning efforts and consistently understated the scope of such planning compared with what their risk management counterparts state,” note the study’s authors. “The results also indicated significant challenges have yet to be addressed, including scenario planning and identifying production bottlenecks, even though contingency planning is a core process now instituted across most of the participants’ businesses.”

Smaller companies are more prone to buy as much as insurance as possible to fund a potential major disruption than bigger companies are, according to the survey. For example, half of the respondents from companies with less than $1 billion in revenues said they have “fully transferred” to others the overall risk associated with their top earnings driver. In contrast only one in four of the respondents from companies with more than $1 billion in sales cited full risk transfer. The remaining quarter of the survey’s participants said their companies have chosen to retain some risk on their balance sheets.

In addition, more than 80 percent of respondents consider terrorists attacks to be mostly an insurance event. “The results of this study indicate there are real, ongoing property hazards that affect a company’s top earnings drivers,” says Ruud Bosman, executive vice president of staff operations and planning at FM Global. “In particular, the potential impact property-related hazards can have has become more prominent as traditional insurance markets become less willing to indemnify all the associated risks after September 11.”

Enron’s McMahon Resigns

Less than four months on the job, Jeffrey McMahon has resigned as president and chief operating officer of Enron Corp., effective June 1.

McMahon, who two years ago raised questions about the partnerships that ultimately led to the energy company’s demise, was working closely with interim chief executive officer Stephen Cooper on a plan to reorganize the company as an asset-backed energy concern focused on pipelines and power.

“I strongly believe that the best course for the Enron estate, its creditors, and its employees is to use our core pipeline and electricity assets to create a new company apart from the litigation and diversions of bankruptcy,” said McMahon in a statement. “For that effort to have every chance of success, it became clear to me that outside leadership is required.”

Cooper, a restructuring specialist who was brought in to save the company, said in a statement that McMahon’s position will not be filled until Enron gets the rollout of the new company. “Regrettably, I support Jeff’s decision,” said Cooper. “Last fall, during tremendous turmoil within the organization, Jeff stepped up as a true leader.”

As you recall, McMahon twice testified before Congress that, as Enron’s treasurer, he raised concerns about partnerships involving former CFO Andrew Fastow. Specifically, McMahon claims he complained about the off-balance-sheet transactions to then—chief operating officer Jeff Skilling. “I find myself negotiating with Andy on Enron matters and am pressured to do a deal that I do not believe is in the best interests of the shareholders,” McMahon reportedly wrote in a note to himself after meeting with Skilling.

Skilling, though, told congressional investigators that during his meeting with McMahon, the Enron treasurer mostly expressed concern about how the off-balance-sheet deals would affect his compensation.

Several days after the meeting with Skilling, McMahon was promoted to president and chief operating officer of Enron Net Works. In that position, he no longer had to communicate with Fastow.

In October, McMahon was named CFO of Enron as part of a reorganization of its executive ranks, and in January he was named president and chief operating officer. He joined Enron in 1994 and spent three years as CFO of the company’s European operations.

McMahon began his finance career with Arthur Andersen in Houston. He then served as CFO of MG Natural Gas Corp. from 1989 to 1994.

Dunn Deal: SEC Names New Corporation Finance Member

The Securities and Exchange Commission has named Martin Dunn deputy director of the division of corporation finance.

“Marty is well versed in corporation finance issues and will play a crucial role as the commission looks to improve the financial disclosure system and streamline the capital-raising process,” said SEC chairman Harvey Pitt.

As deputy director, Dunn will assist division director Alan Beller in implementing the commission’s modernization of financial disclosure and disclosure review systems and will play a key role in the management of the division of corporation finance.

“Marty has broad experience in the division and a tremendous depth of knowledge of the securities industry,” said Beller in a statement. “He has a long record of accomplishment with the Commission, and many inside and outside the agency seek his advice. With his versatility, enthusiasm and dedication to the agency and the investing public, I know he will continue to make remarkable contributions in this position.”

Dunn, 38, joined the division of corporation finance as an attorney in 1988. He has served as special counsel, deputy chief counsel, chief counsel, associate director (disclosure operations), and, most recently, associate director (legal).

Andersen’s Latest Defections

KPMG has picked up two more of Arthur Andersen’s clients.

Management at Security Capital Group Inc., which is merging with GE Capital Corp., said it hired KPMG LLP as its independent public accountants. The real estate company’s management said it made the switch in anticipation of the closing of the transaction.

In addition, AFC Enterprises Inc. named KPMG to replace Andersen, which had served as AFC’s accountant since 1992. Last year, the restaurant franchiser and operator paid Andersen $314,900 for audit services, $343,171 for tax consulting services, and $729,000 for services related to the company’s initial public offering.

Elsewhere, Mediacom Communications Corp. said it hired PricewaterhouseCoopers to replace Andersen. Andersen had served as Mediacom’s independent auditor since the cable television company began operations in 1996.

Angelica Corp., which provides textile rental and laundry services to health-care, hospitality, and other service industries, hired Deloitte & Touche as its external auditor to replace Andersen. Management at Angelica said the change was made solely due to concerns about Andersen’s future viability in the wake of its recent federal indictment. Andersen had been Angelica’s independent accountant since 1954.

In 2001, Angelica paid Andersen $166,500 in audit fees and $45,475 for other services, including benefit-plan audits, tax assistance, and other operational consulting services.

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