Risk & Compliance

Enron Doesn’t Deliver, but in Bankruptcy It May Still Collect

Also: Motorola to spin off sagging semiconductor unit; FASB weakens proposed changes in M-and-A accounting; should consultants be held legally resp...
Dave CookOctober 7, 2003

Nevada-based power company Sierra Pacific Resources may be required to pay Enron for some $330 million worth of power that Enron never delivered. The two electric power units of Sierra entered into contracts with Enron Power Marketing in 2000 and 2001 — during a period of huge increases in the price of electric power — committing Enron to deliver electricity in future periods. When Enron entered bankruptcy late in 2001, an already-struggling Sierra was unable to pass along increased costs to consumers, and credit agencies downgraded Sierra’s debt.

To protect its position in the contract, Enron demanded that Sierra post collateral for the full amount of the future contracted payments; when Sierra refused, Enron terminated the contract and demanded payment in full. The New York bankruptcy court that is hearing the case has so far sided with Enron; Sierra is expected to file an emergency request with the Federal Energy Regulatory Commission, asking it to invalidate the payment requirement.
Source: The New York Times

Motorola to Spin Off Sagging Semiconductor Unit

Schaumberg, Illinois-based Motorola Inc. plans to spin off its semiconductor chip unit, the company’s second-largest division, and devote more attention to its mobile-phone unit. Motorola is the world’s second-largest mobile-phone maker, trailing only Nokia. Sales of the chip unit have fallen 48 percent since 2000, to $4.8 billion last year — about 18 percent of Motorola’s revenue, according to a statement by the company.

The company is considering an IPO of the semiconductor unit, and would distribute the remaining shares to Motorola shareholders, but details have not yet been finalized, the company announced.
Source: Bloomberg

FASB Weakens Proposed Changes for M-and-A Accounting

The Financial Accounting Standards Board is watering down proposed reporting rules that would have required companies to break out the earnings and revenues of businesses they have recently acquired. The proposed rules, for which a draft is expected by the end of the year, are intended to help investors distinguish whether a company’s growth comes from existing operations or from an acquisition.

One change to FASB’s original proposal allows a company to exempt itself from the new requirements by claiming that they are “impracticable”; that term has not yet been defined by FASB and would be left to the judgment of each company. A second change would allow companies to disclose growth numbers, not for the entire first year after the acquisition, but only from the date of the acquisition through the end of the acquirer’s fiscal year. If that change stands, “I think we’re going to see a lot of deals close around the end of the fiscal year,” said Gregg Feinstein, managing director and head of mergers and acquisitions at Jefferies & Co.
Source: Corporate Financing Week

Consultants Should Be Held Legally Responsible, Say Executives

In a survey of 200 senior executives, 68 percent said that they believe management consultants should be held legally responsible for their advice and actions. In addition, 80 percent are pushing their consultants to be more results-oriented and to demonstrate more-quantifiable outcomes; 66 percent are seeking to have projects completed in less time. At present, only 15 percent include success-based criteria into their contracts with consultants.

The surveyed executives work at companies with $500 million or more in annual revenues and with at least 500 employees. The survey was conducted by Taylor Nelson Sofres on behalf of Celerant Consulting.
Source: SmartPros Accounting

Justice Department Months Away from Oracle-PeopleSoft Ruling

Government lawyers are still awaiting much of the information they demanded from Oracle Corp. in their June 30 formal “second request” for information on its proposed acquisition of PeopleSoft Inc. According to one source, Oracle might not fully comply with the request for documents for another eight weeks or so. Once Oracle fulfills the request, the Justice Department would have 30 days to file a suit to stop the deal.

PeopleSoft maintains that the deal would reduce the number of major enterprise-software makers from three to two; the other is Germany’s SAP. In 2000, a federal appeals court ruled that “three-to-two mergers” are almost always illegal. Oracle disputes that such an enterprise-software market exists; the company maintains that it competes with many other companies to provide many discrete applications that companies often purchase individually.
Source: The Daily Deal

Big Board to Investigate AIG Specialists

In the wake of last week’s revelations that former New York Stock Exchange chairman Richard Grasso may have influenced trading in American International Group Inc., NYSE regulators will investigate the floor specialists who trade AIG. (Specialists oversee the buying and selling of a company’s stock, and when investors are too few in number, they use capital from their firm’s own account to “create a market.”) Trading in AIG is overseen by Spear, Leeds & Kellogg, a unit of Goldman Sachs Group Inc.; a spokesman for Goldman said the firm had done nothing wrong.

In recent years, according to people familiar with the matter, AIG chairman and CEO Maurice “Hank” Greenberg complained to Grasso that the exchange’s AIG specialist did not do enough to lessen volatility in the company’s stock, and several times Grasso approached the specialist and suggested that he buy more shares.
Source: Dow Jones Newswires

It’s How You Spend on IT, Not How Much

A recent study by Atlanta-based consultancy the Hackett Group found that, of its 2,000 clients (including 81 of the Fortune 100), most spend about $11,000 per end user. Companies that Hackett identifies as being in the top quartile for IT effectiveness and efficiency, however, actually spend 27 percent more than average companies on systems — and 20 percent less on process costs.

These “world-class companies,” as Hackett describes them, spend 59 percent of their IT budget on basic infrastructure and operational support, compared with 69 percent for average companies; they spend 50 percent of their time on strategic planning and decision making (compared with 29 percent); and they spend only 25 percent of their time handling support duties (compared with 46 percent). As a result, the world-class companies spend 38 percent less than their average counterparts on finance transaction and process controls.
Source: Darwin

Is Microsoft Susceptible to Product-Liability Lawsuits?

Microsoft Corp. is the target of a lawsuit filed in Los Angeles Superior Court alleging that it is engaging in unfair business practices due to its failure to better protect its software from viruses and worms. The suit claims that the company’s software may create “massive, cascading failures” in networks across the globe.

Software makers usually protect themselves through license agreements that shield them from claims of product liability. However, the plaintiff’s attorney, Dana B. Taschner, argues that Microsoft’s market share (for Windows software) is so great that users have little choice, so Microsoft must accept responsibility. The suit, though filed for a single plaintiff, is designated as a class action. Microsoft representatives were not immediately available for comment.
Source: NewsFactor Network

Tyco Jury in Place, Opening Arguments Possible on Tuesday

A 12-person jury was sworn in late last week in the trial of two ex-Tyco executives, former chairman and CEO Dennis Kozlowski and former CFO Mark Swartz. The trial will be conducted in State Supreme Court in New York City by Judge Michael Obus. The jurors include a former consultant for PricewaterhouseCoopers, an employee for a unit of UBS, a sportswriter who once worked for Goldman Sachs, and an accountant for a law firm.

Opening arguments may be heard today, and witnesses may be called as early as Wednesday. Judge Obus has said that the trial may last four months. Kozlowski and Swartz, if convicted of grand larceny, enterprise corruption, and falsifying business records, could each be sentenced to 30 years in prison.
Source: Dow Jones Newswires

Biotech IPOs Big in October

More than half of this month’s scheduled initial public offerings — 10 of 18 — are for biotechnology companies. The sector as a whole has seen significant gains; the Nasdaq Biotechnology Index is up 50 percent since January 1, and 70 percent since its low about a year ago. However, none of the companies, including Genentech and Millennium Pharmaceuticals, is making money. Noted one analyst, “People are buying into an opportunity.”
Source: The Street.com

Touche, Meet Haskins and Sells

Since the 1989 merger of Big 8 accounting firms Deloitte Haskins & Sells and Touche Ross, the combined firm has been known as Deloitte and Touche. Now, however, while global parent Deloitte Touche Tohmatsu, as well as Deloitte Consulting and Deloitte and Touche, will retain their local legal names, the firm will now be globally branded as “Deloitte.”
Source: AccountingWeb