Risk & Compliance

Fastow May be Indicted Soon, Says Story

Report: Former Enron CFO may be charged within weeks; WorldCom execs could be next. Also: optical illusion at Qwest. Plus: Senate approves Bush SEC...
Stephen TaubJuly 29, 2002

Is former Enron Corp. CFO Andrew Fastow about to be indicted?

According to a report by Bloomberg over the weekend, the Justice Department could file formal criminal charges against Fastow in the next few weeks. That would make Fastow the first Enron executive to be charged in connection with accounting irregularities that led to the second largest U.S. bankruptcy ever.

The Bloomberg article noted that a criminal case was brought last month against three former employees of London-based National Westminster Bank Plc. Those three are accused of skimming $7.3 million from a partnership managed by Fastow. According to Bloomberg, that case lays the foundation for fraud charges against the former Enron finance executive.

But Justice Department spokesman Bryan Sierra told the wire service, “the story is not accurate” and declined to elaborate.

The Bloomberg article, however, stated that former WorldCom Inc. Chief Executive Officer Bernard Ebbers and two other key WorldCom executives could also soon face formal charges from U.S. prosecutors.

Meanwhile, according to a Reuters report Sunday night, the Justice Department is not ready to file criminal charges against Fastow. That article cited sources familiar with the investigation.

In a related story: on Friday Schuyler Tilney, the head of Merrill Lynch’s energy and power group (who was subpoenaed by the Senate Permanent Subcommittee on Investigations to testify at a hearing scheduled for Tuesday), was put on administrative leave. Against the advice of his lawyer, Tilney refused to testify about allegations that Merrill worked closely with Enron.

Qwest Quake: Company may Restate

Management at Qwest Communications International Inc., whose accounting practices are currently being investigated by the SEC, said late Sunday night said it may restate the company’s results for 1999, 2000 and 2001. The restatement would be in connection with sales of optical capacity assets.

Qwest management said it misapplied about $1.16 billion in optical capacity sales.

“Certain adjustments may be required to correct the period in which the revenue was recognized with respect to some transactions, and other adjustments may be required to reverse the recognition of revenue with respect to other transactions,” Qwest management noted in an announcement.

The company’s management did note, however, that its revenue recognition policy was approved by its prior auditor. And who was that? Arthur Andersen.

In addition, further adjustments are required to account for sales of equipment in 2000 and 2001 that the company had previously determined had been incorrectly recorded, the telco’s management added.

Earlier in the year, the company and its board of directors began an analysis of, among other things, revenue recognition and accounting treatment for optical capacity sales — particularly sales to customers from which the company agreed to purchase optical capacity assets. The company also began looking into the sale of equipment by Qwest to certain customers and changes in the production schedules and lives of some of its directories.

In the fourth quarter of 2001, the company reduced revenue and adjusted EBITDA related to these equipment transactions. The company’s management added that in a limited number of transactions it did not properly account for certain expenses incurred for services from telecommunications providers in 2000 and 2001.

Qwest is continuing to analyze its accounting policies and practices in consultation with its new auditor, KPMG. When the company completes its analyses, it expects to restate its financial statements for prior periods.

“The company will attempt to conclude these analyses promptly,” Qwest management added. “However, as a result of the change in the company’s auditors and the ongoing investigation by the SEC, the company cannot state with certainty when a restatement will be completed.”

Qwest management added KPMG will not be able to finalize its review of the second quarter financial report.

KPMG Put on Probation

Speaking of KPMG: the California Accounting Board put KPMG on probation for one year and fined the accountancy $1.8 million. The reason? Reportedly, the board claims gross negligence and unprofessional conduct on the part of KPMG contributed to Orange County’s 1994 bankruptcy.

According to a published account of the board’s order, if the accounting firm commits additional violations, it could face more serious sanctions, such as a suspension of the firm’s license to do business in the state.

The California Accounting Board’s order is scheduled to go into effect Aug. 24.

Apparently, management at KPMG is none too thrilled by the ruling. “KPMG will not allow itself to be the scapegoat for the board’s failure to supervise its own investigative staff during the past eight years,” the company said in a statement. “KPMG intends to vigorously pursue every avenue of appeal.”

According to the Associated Press, the board’s ruling asserts that KPMG’s lead audit partner, Margaret Jean McBride, cut corners and ignored warning signs as county treasurer Robert L. Citron filed false accounts and faked interest earnings,

Under the terms of the probation, KPMG’s government auditing section must undergo an investigation, and staffers must take 40 hours of coursework in the area, according to the report, citing Greg Newington, the board’s enforcement chief.

Short Takes

  • The Senate unanimously approved four of President Bush’s nominations to the SEC. They are Texas broadcasting entrepreneur Roel Campos, Columbia University law professor Harvey Goldschmid, economist Cynthia Glassman and attorney Paul Atkins. Glassman is currently serving on the SEC under a one-year recess appointment.
  • Switchboard Inc. said it will restate its financials for fiscal 2001, reducing about $2.7 million of revenue and expense attributable to a sale of banner advertising to a single customer, which failed to make a scheduled payment. While seeking to collect payment, additional information regarding the customer and its relationship with one of Switchboard’s vendors was evaluated by Switchboard and its recently hired auditor, Ernst & Young.

“Based upon this evaluation, Switchboard has determined that it is more appropriate to record the banner advertising as a reduction of expense, instead of a contribution to revenue, in 2001,” said the company’s management, in its press release.

  • More than two-thirds of U.K. institutional investors in U.S. equities believe the U.S. accounting scandals will lead to reform of European accountancy regulation, according to a survey of 30 U.K. institutional investors in U.S. equities. Those institutions account for an estimated 20 per cent of investment in the London stock market by capitalization. The survey was undertaken by Cubitt Consulting, an international investor relations consultancy.

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