Risk & Compliance

Going Belly-Up Going Down

But it will still be a rough year for carmakers and chemical companies. Elsewhere: Xerox probe said to be widening, Duncan pleads guilty, and look ...
Stephen TaubApril 10, 2002

About 200 companies will file for bankruptcy in 2002. Half of those will be in the manufacturing sector.

At least those are some of the conclusions of a new study conducted by PricewaterhouseCoopers. According to the forecast, the bulk of public-company bankruptcies will come from the telecommunications, auto, computer hardware, metals (steel), chemical, and retail sectors. Last year, 257 publicly held corporations declared bankruptcy.

“What we’re seeing in each of these sectors is the continuing economic fallout that comes after a period of 9 or 10 years of unbridled growth,” says Carter Pate, author of the report and managing partner of PwC’s financial advisory services. “We had a sharp and difficult contraction, compounded by the events of September 11, and these have exacerbated conditions for companies already beset by high leverage and other risks.”

PwC based its forecast on 2001 bankruptcy data, as compared with 1991 figures (when the last recession ended). The firm also performed an analysis of currently underperforming public companies.

PwC also identified public companies with six consecutive quarters of accelerating declining earnings. Of 234 companies within this category, 47 percent are in the manufacturing sector and 23 percent are in the service sector.

Other conclusions of the report:

  • Telecom failures will include CLECs, co-location and long-haul fiber companies, and larger emerging carriers hurt by weak markets and overleverage. The telecom sector will begin to recover in late 2002 or early 2003.
  • The automotive industry has yet to feel the negative impact of its 0 percent financing strategy.
  • Computer hardware makers won’t see a rebound in their business until next year.

The report also noted that 2001 was the worst year in two decades for the chemical industry. The reason for the hard times in Delaware? Rising energy costs, excess capacity, and the economic slowdown. PwC predicts chemicals will see improved profits this year—not surprising, given how bad 2002 was.

In a related story, Moody’s Investors Service downgraded the senior debt ratings of Dow Chemical Co. to A3 and the short-term rating to Prime-2. Moody’s also lowered the debt ratings of Union Carbide, which Dow recently bought. The long-term rating was cut to Baa2 and the short-term rating to Prime-2. The rating agency cited both companies’ depressed financial performance and heightened financial leverage, the limited prospects for an economic recovery in 2002, and the potential for adverse credit implications due to litigation and other event risk factors.

Report: Xerox Probe Expanding

Will Enron and Andersen be shoved out of the headlines by Xerox and KPMG?

Reportedly, the Securities and Exchange Commission is investigating the former CFO and other executives at Xerox, as well as its former auditor, KPMG. According to The Wall Street Journal, the commission is also said to be mulling filing civil charges against both companies.

The probe stems from the copy maker’s accounting practices. Last week it agreed to pay a $10 million civil penalty and restate its financials dating back to 1997. The company added in a statement at the time that the restatement “could involve a reallocation of equipment sales revenue in excess of $2 billion.”

According to the Journal, former Xerox chairman Paul Allaire and former CFO Barry Romeril are among at least six individuals who have received official notices that charges may be filed against them. In addition, a notice apparently was sent to Michael Conway, a KPMG partner who co-headed Xerox’s audit.

If the SEC does wind up filing civil charges against these individuals, it may be further proof that the commission will indeed hold top executives and their individual auditors legally responsible for any accounting transgressions.

The troubles at Xerox started out in late 2000 as a simple investigation of accounting practices at the company’s Mexican operations. But that investigation has touched off a firestorm of controversy about Xerox’s accounting practices.

Allaire and Romeril retired from Xerox at the end of 2001.

KPMG spokesman George Ledwith told the Journal: “We firmly believe that we demonstrated tremendous backbone in the Xerox case, stood up to a huge client, never caved. We did everything an auditor is expected to do—and we were fired.”

Last May, however, Xerox management claimed auditor KPMG certified the company’s financial statements for the three years ended December 31, 2000—and found no phantom sales. “After rigorous reviews of Xerox’s accounting, no fictitious transactions were found, and the company’s liquidity is not impacted,” said then—Xerox CEO Allaire in a statement at the time.

Duncan Pleads Guilty

As CFO.com reported yesterday, David Duncan, formerly Andersen’s lead auditor on the Enron account, pleaded guilty Tuesday to obstructing justice.

Just as important to the Justice Department, he now becomes a key witness in its case against Andersen.

Duncan pleaded guilty to one felony count of obstructing justice by ordering thousands of Enron documents destroyed between October 23 and November 9. At the time, Duncan was Andersen’s global managing partner on the Enron account.

“I accept that my conduct violated federal criminal law and I am willing to accept responsibility for it,” Duncan told the judge. “I know documents were in fact destroyed so that they would be unavailable to the SEC and others.”

According to the plea entered yesterday, Duncan knowingly and intentionally persuaded other Andersen employees to withhold documents from an investigation conducted by the SEC. He also destroyed and concealed documents to hamper the commission’s investigation.

For his acts, Duncan now faces a sentence of up to 10 years in prison, a maximum fine of $250,000, and potential restitution costs.

Andersen fired Duncan on January 15, saying he was responsible for the massive shredding of critical documents. The former lead Enron auditor will be sentenced on April 26.

In an exclusive CFO.com poll, only 8 percent of respondents said they believe Duncan acted alone in ordering the destruction of Enron-related documents.

Other Andersen Stuff

Fox Paine & Co., the San Francisco buyout firm, signed a memorandum of intent to acquire Andersen’s tax unit in a management-led buyout for between $800 million and $900 million, according to The Wall Street Journal. If the bid is successful, it will top a competing offering from Big Five firm Deloitte & Touche. Representatives from Andersen’s Mexican unit, however, agreed to merge their practice with Deloitte Touche Tohmatsu.

Also yesterday: four more high-profile Andersen audit clients dumped the firm. Management at software vendor Oracle Corp. said it would replace the indicted auditor with Ernst & Young.

“Arthur Andersen has done excellent, professional work for Oracle for the past 15 years and we have the utmost respect for the people with whom we have worked,” said Jeffrey Henley, Oracle’s chief financial officer. “Unfortunately, we believe we are forced to change auditors given the breakup that started to occur within Arthur Andersen’s global practices in the past few weeks.”

In addition, International Paper Co. announced it would replace Andersen with Deloitte & Touche LLP. And management at Walgreen Co. said it would no longer use Andersen. The retailer has not selected a new auditor yet.

Management at Learning Tree International Inc. also said it would bring in Ernst & Young to replace Andersen. The switch ends a 17-year relationship with the auditor.

(To see a ranking of the Big Five firms by revenues and lines of service, click here.)