Risk & Compliance

WorldCom Halfway Home

Federal judge okays partial settlement in troubled telco's fraud case; fine could be record. Plus: Former Enron finance exec pleads guilty, FASB is...
Stephen TaubNovember 27, 2002

WorldCom took a major step toward emerging from bankruptcy when a federal judge on Tuesday approved a partial settlement in what the Securities and Exchange Commission has deemed the largest corporate fraud in the commission’s 70-year history.

The SEC’s case is still open, however, and WorldCom still has a good chance of facing a huge fine.

“This shows the company has made laudable progress in moving toward a much more positive position and the correction of past mistakes,” U.S. District Judge Jed Rakoff said in a hearing, according to wire service accounts. The agreement is “a model of what should be attempted in a case of this sort.”

Without admitting or denying the fraud allegations, WorldCom agreed to refrain from future securities violations, retain consultants to review its internal accounting controls and policies, and institute a mandatory training program for all its officers and employees involved in accounting and financial reporting.

“This was a critical prerequisite to going forward with a rescue of WorldCom,” James Owers, professor of finance at Robinson College of Business at Georgia State University in Atlanta, told Reuters. “All of those questions (about WorldCom’s viability) will be eased in terms of the employees who work there but probably most critically for clients’ potential to do business [with WorldCom]. “

Owers added: “This is a major clearing of the stage.”

A fine is not expected to be imposed until next year. Published reports have speculated that WorldCom could be assessed millions of dollars, possibly surpassing the $7 million fine accountancy Arthur Andersen and four of the firm’s partners agreed to pay back in June 2001. That settlement stemmed from Andersen’s audits of Waste Management Inc. from 1992 to 1996. Andersen went out of business this year.

“The requirements of this agreement are squarely in line with steps we are already taking to restore public confidence in WorldCom,” WorldCom chief executive John Sidgmore said in a statement. “Our agreement with the SEC provides additional assurance that WorldCom’s plan to emerge from bankruptcy remains on schedule.”

The SEC, of course, has brought fraud charges against WorldCom, which has admitted to overstating earnings by about $9 billion during a three-year period. The bulk of the overstating came from WorldCom’s treatment of costs as expenses.

Former Enron Finance Exec Pleads Guilty

Former Enron Corp. finance executive Larry Lawyer pleaded guilty on Tuesday to tax evasion, according to published reports.

Lawyer admitted not reporting $79,000 he was paid during a period of four years for work on a controversial partnership that figures prominently in the indictment against former Enron CFO Andrew Fastow, according to Reuters.

Lawyer’s attorney Robert Sussman told reporters the money was given to Lawyer, a former finance executive, and members of his family by former Fastow protégé Michael Kopper. “It’s certainly work-related, and [Lawyer] should have reported it on his taxes, but he didn’t,” Sussman reportedly conceded after the hearing. “It’s not fraud. Kopper told him it was a gift.”

Back in August, Kopper pleaded guilty to two counts of conspiracy.

As part of his plea deal, Lawyer reportedly agreed to cooperate with prosecutors, and on Tuesday he paid $79,000 to an Enron employees relief fund.

He faces up to three years in prison, and must pay more than $29,000 in back taxes.

Interpublic Names New Unit CFO

The Interpublic Group named Arthur D’Angelo chief financial officer of its embattled McCann-Erickson WorldGroup unit, effective January 2003.

For the past 15 years, D’Angelo has held top financial and administrative positions within the advertising and marketing services industry.

As CFO.com reported, Interpublic restated $181.3 million in expenses not previously accounted for in the past five years.

Since 1997, D’Angelo served as finance director and a member of the board of directors of Cordiant Communications, a communications company. Prior to that, he served as CFO of Cordiant’s Bates Worldwide advertising agency network.

“His hands-on style, commitment to excellence, and love of the communications business will all be significant assets for our company,” said James R. Heekin, chief executive officer of McCann-Erickson WorldGroup. “In his new role, Art will have dual reporting lines. On operational matters, he will report directly to me. To ensure coordination with Interpublic, on all financial matters he will report directly to [Interpublic CFO] Sean Orr.”

D’Angelo’s business career began in 1972 at Ernst & Whinney, where he was a member of its professional audit staff. In 1978, he joined BP North America as deputy tax director, rising to vice president, mergers and acquisitions, in 1986.

FASB Issues New Rules for Guarantees

The Financial Accounting Standards Board (FASB) published a new interpretation of rules for issuers of guarantees. The rule is intended to provide better and more-transparent disclosure requirements.

The interpretation elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit, FASB indicated.

According to the standards-setting board, the interpretation also clarifies that, at the time a company issues a guarantee, that company must recognize an initial liability for the fair value, or market value, of the obligations assumed under that guarantee. The issuer must also disclose that information in its quarterly and annual reports.

“By improving the required disclosures and accounting, FASB’s new accounting guidance will provide a more representationally faithful picture of a company’s financial position and the risk it has assumed,” said FASB senior project manager Robert C. Wilkins. “The interpretation should significantly improve the reporting of guarantees that are issued in conjunction with other transactions, such as when a seller also guarantees its customer’s repayment of the funds borrowed to pay the seller for the customer’s purchases.”

FASB added the guidance does not apply to guarantee contracts issued by insurance companies or for a lessee’s residual value guarantee embedded in a capital lease. The provisions related to recognizing a liability at inception of the guarantee for the fair value of the guarantor’s obligations would not apply to product warranties or to guarantees accounted for as derivatives, it said.

The initial recognition and initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002, regardless of the guarantor’s fiscal year-end, stated FASB. The disclosure requirements in the interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002.

Cole National Restates Results
Cole National Corp. said it will restate its financials dating back to fiscal 1998 as a result of how it recognized revenues earned on the sale of optical warranties.

The eyewear and giftware company placed the blamed for the restatement squarely on Arthur Andersen, which served as the company’s independent public accountants for many years. Cole management said Andersen insisted on issuing unqualified opinions on the company’s annual financial statements.

The company explained in a press release that customers purchasing eyeglasses are offered the option of buying a warranty for up to two years, paying in full for the warranty at the time of sale. In most states, the warranties involve third-party insurance arrangements, it said.

“Based on its review of its accounting methodology with its prior independent public accountants, Arthur Andersen LLP, and the advice it received at the time, the company believed that recognizing the revenue at the time of sale was appropriate,” it stated.

Cole said that the up-front payment should be recognized over the warranty period, upon the advice of its new auditors, Deloitte & Touche LLP.

This will result in a material change in the timing of recognition of the revenue and operating profits associated with these sales, and material changes in current and prior balance sheets relating to deferred revenue and shareholders’ equity, the company added.

“We believed that the accounting methodology followed was appropriate, but working with our new auditors, we will complete the restatement as quickly as possible,” said chairman and chief executive officer Jeffrey Cole in a statement.

As a result of the restatement, the company said it will delay the filing of its 10-Q for the third quarter of 2002.

OB: SEC Settles in Golden Bear Case

One more from the Andersen files: the SEC settled charges yesterday with Michael Sullivan, the Arthur Andersen engagement partner who conducted the 1990, 1997, and 1998 audits and quarterly reviews of Golden Bear Golf Inc. Golden Bear Golf is owned by golf legend Jack Nicklaus, as well as the golf course construction subsidiary Paragon Construction International Inc.

Under the settlement, Sullivan did not admit or deny the findings.

The SEC alleged Sullivan issued an unqualified audit report in connection with the 1997 audit of Golden Bear, stating that the financial statements conformed with generally accepted accounting principles (GAAP) and that Andersen conducted the audit in accordance with generally accepted auditing standards (GAAS).

“In fact, Sullivan issued an unqualified audit report when he knew or was reckless in not knowing that Golden Bear’s revenue recognition practices at Paragon did not conform to GAAP, and was reckless in not knowing that Golden Bear improperly failed to disclose that the company’s change in the way it recognized revenue resulted in a material increase to earnings and failed to disclose certain material terms of related-party transactions,” the SEC stated in its complaint.

In addition, Sullivan was reckless in not knowing that the audit was not conducted in accordance with GAAS in that he excessively relied on Paragon’s internal controls and excessively relied on management’s representations about key estimates rather than develop sufficient competent evidential matter supporting them as required by GAAS, the commission added.

The SEC charged that the audit team under Sullivan’s direction failed to adequately test Paragon’s costs, revenues, and percentage-of-completion estimates, including the failure to include job-site visits and discussions with project managers and other on-site operating personnel in its audit, adequately test estimated total costs, and adequately test estimated total revenues.

The commission did not offer Sullivan a mulligan to redo his audits on Golden Bear.