Risk & Compliance

Go West?

San Diego best for business; last year's top spot, San Jose, drops to 61. Elsewhere: Should Congress cap auditors' liability, who took the heat in ...
Stephen TaubMay 10, 2002

Despite rolling blackouts, annual water shortages, and the occasional 7.2 earthquake, California is, apparently, the best state to do business.

The Golden State’s cities took 6 of the 10 top spots—and 10 of the 25 highest positions—in the annual Forbes/Milken Institute study of the best places to do business and advance a career in America.

The top city on the list? San Diego.

Nearly 300 U.S. metro areas were ranked according to wage and salary growth, job growth, and high-tech output growth, among other criteria.

This year, the study included a “job momentum” category that tracked employment during the first quarter of 2002 to gauge how metro areas were dealing with the effects of the slowing economy.

Why did San Diego rank first? Besides the climate of a solarium, the southern California city had the most-diversified high-tech economy in the United States, with hundreds of biotech, communication, software, and information technology outfits, according to the survey.

The city with the highest five-year job growth is Las Vegas, at 32 percent. It ranked third overall in the survey.

San Jose, which took the top spot last year, fell to 61, mostly because the Internet bubble burst, the survey noted. This is the same reason why San Francisco sank to 54 from third place.

The top 15 cities are:

  • San Diego, Calif.
  • Santa Rosa, Calif.
  • Las Vegas, Nev.
  • Ventura, Calif.
  • McAllen, Tex.
  • Boise, Idaho
  • San Luis Obispo, Calif.
  • Oakland, Calif.
  • Brownsville, Tex.
  • Orange County, Calif.
  • Riverside, Calif.
  • West Palm Beach, Fla.
  • Boulder, Colo.
  • Dallas, Tex.
  • Vallejo, Calif.

First Auditor Independence, Now Auditor Insurance

An insurance crisis is developing for the major accounting firms.

Spooked by the unlimited liability from Andersen’s role as Enron’s auditor, insurers are refusing to provide coverage to other accounting firms, insists Jim Copeland, chief executive officer of Deloitte & Touche.

As a result, Copeland says Congress must write legislation that would cap the liability of major accounting firms. “The problem is, you can’t get [insurance] for very much” liability, Copeland told reporters at an event in Los Angeles on Thursday, according to Reuters. He said most major accounting firms are essentially uninsured for liability.

In fact, insurers would not provide coverage for more than $100 million of liability even before the Enron debacle, Copeland claims.

That sum now seems woefully insufficient, given that Andersen last week agreed to pay $217 million to settle claims stemming from the collapse of the Baptist Foundation of Arizona. Most of the settlement will be paid by Andersen’s insurer.

Copeland’s solution to the auditor insurance problem: Congress must cap liability exposure in individual cases. How much? About $100 million to $200 million per case, he added. This would make it easier for insurance companies to handicap their risk and price the policies.

“Some level of accountability in the courts is good for us,” he reportedly said. “But when you start talking about…having billions of dollars in liability on a single audit…it just doesn’t make sense.”

WorldCom Cut to Junk

Moody’s cut WorldCom Inc.’s credit ratings to junk status Thursday.

The ratings outfit lowered the senior unsecured debt of the embattled telecom company to Ba2 from Baa2, and the rating of WorldCom for commercial paper to Not Prime from Prime-2. The long-term ratings remain on review for possible further downgrade.

“The downgrades reflect the significant deterioration in the company’s operating performance, expectations for continued weakness for the foreseeable future, the company’s substantial debt load including sizable maturities over the next two years, and its need to restructure its maturing bank facility (although it does contain a one year term out option) and accounts receivable securitization program, which contains an investment grade ratings trigger,” said Moody’s in a statement.

The rating agency noted that after two quarters of sequential revenue declines, WorldCom has materially reduced its guidance for 2002 in the face of an accelerating decline in voice services, weaker-than-expected data traffic, and disappointing performance in its data and Internet markets. “While the decline in voice revenues was expected, in both the MCI and WorldCom units, the decline in data and Internet hits at the company’s traditional areas of strength,” added Moody’s.

WorldCom’s debt (including preferred stock issues and $2 billion in receivable financing) has swelled from $26.6 billion at the end of 2000 to $33.5 billion as of April. Worse, the decline in operating performance has driven adjusted gross debt to EBITDA from just over 2.1 times for 2000 to nearly 4 times in 2002.

WorldCom’s banks want the company to pledge assets in return for $5 billion of loans in order for it to meet principal payments next year.

In other financing news yesterday:

Xerox Corp. is close to securing a new $3.5 billion loan as part of a refinancing of a critical $7 billion loan, according to Bloomberg.

As you know, the document-and-copier company has come under heavy fire in recent months. In April, it agreed to pay a $10 million fine as part of a settlement with the Securities and Exchange Commission. The commission charged that Xerox management schemed to defraud investors during a four-year period by using what it called “accounting actions” and “accounting opportunities” to meet or exceed Wall Street expectations and disguise its true operating performance.

The SEC stated that most of these actions violated generally accepted accounting principles (GAAP), thus accelerating the company’s recognition of equipment revenue by more than $3 billion and increasing its pretax earnings by approximately $1.5 billion.

As CFO.com reported this week, the commission is apparently now investigating Big Five firm KPMG for its audits of Xerox’s financial statements.

Andersen on Trial

David Duncan, the former Arthur Andersen partner who was the lead auditor on the Enron Corp. account, took most of the heat at Andersen’s obstruction of justice trial Thursday.

Andersen partner Ben Neuhausen testified that Duncan, who has already pleaded guilty to the same charge—and is the prosecution’s star witness—stretched accounting rules “to excess” and ignored advice from an in-house watchdog. This, according to published accounts of the federal trial in Houston.

“I thought [Duncan] pushed to excess on aggressive interpretation,” said Neuhausen, referring to Duncan’s approval of the way Enron masked the financial problems of its controversial Raptor partnerships.

In opening arguments on Tuesday, federal prosecutors argued that the Enron audit was just one in a serious of botched engagements by Andersen. Government lawyers trotted out evidence of the auditor’s role in several past accounting scandals. Those scandals include previous bookkeeping problems at appliance maker Sunbeam and trash hauler Waste Management Inc.

“There was a day when the firm knew that the law was going to come knocking at its door because of a series of billion-dollar accounting errors,” assistant U.S. attorney Matt Friedrich told jurors. “They knew these things were coming because Andersen was already under a form of probation with the SEC.”

In other Andersen-related news, USA Education yesterday hired PricewaterhouseCoopers to replace Andersen as its auditor. Lear Corp. also dumped Andersen as its independent auditor, signing on with Ernst & Young instead.

Meanwhile, CRIIMI MAE Inc. announced it too dismissed Andersen as its auditor, but has not found a replacement yet. Andersen had served as auditor for the commercial-mortgage company since 1991.

Short Takes

>> Life insurer Principal Financial Group Inc. took a $281 million charge to write off goodwill on some operations, mostly the company’s international money-management and pensions unit.

>> On Thursday, shares of Regal Entertainment Group, the nation’s largest movie-theater chain, closed up nearly 15 percent, at $21.75, in their first day of trading. The company, which is a rollup of a number of chains, raised $342 million from selling 18 million shares. The company is controlled by billionaire Philip Anschutz.

>> A recent survey of leading money managers by Consulting Group, the managed money unit of Salomon Smith Barney, found that 58 percent of those surveyed believe that public accounting firms should focus solely on auditing, and eliminate consulting practices. The managers expressed skepticism that accounting firms could monitor potential conflicts of interest or ensure unbiased opinions. Nearly one-quarter (23 percent) of the respondents were undecided about whether accountancies should split the two units, while 19 percent opposed eliminating consulting from the firms’ product lines. Investment managers in the survey who did not favor a split noted that accounting firms are experts in many of the issues facing their clients, and may be in the best position to render knowledgeable advice.

4 Powerful Communication Strategies for Your Next Board Meeting