The Economy

Can’t Anybody Around Here Add?

Bad apples, a good egg, loutish behavior, and the worst bookkeeping in the history of numbers. All in all, just another typical week in finance.
John GoffJune 28, 2002

The usual suspects? These days, they’re mostly CFOs.

GOOD WEEK

1. Enron Corp.

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What’s the one thing that can make a $1.2 billion restatement seem minor? A $3.8 billion restatement.

Enron’s managers — both current and ex — won’t ever say it publicly, but privately, they must be thrilled with WorldCom’s announcement this week. For one thing, WorldCom’s restatement knocks Enron off the front page for the foreseeable future. For another, it gives the media and the investing public a whole new set of executives to throw fruit at (Andrew Fastow out, Scott Sullivan in).

When asked to comment on the WorldCom restatement, former Enron CEO Jeff Skilling said he thought it was deplorable, noting that he first heard about the news on the TV in his den. Later, when asked by House Committee members to explain his comment about WorldCom, Skilling seemed puzzled, noting there had been a blackout in his house that day, and he therefore couldn’t recall what he’d heard about WorldCom — or if he’d even been in his den that day.

2. Andrew Bonfield

On Wednesday, Bristol-Myers Squibb announced the company had hired Andrew Bonfield as new CFO. Bonfield replaces Fred Schiff, who left the besieged drug maker in April after the company lowered its revenue guidance for 2002.

While Bonfield joins Bristol-Myers from oil company BG Group, that gig was just a stopover. The fact is, Bonfield was once a rising star at British pharmaceuticals behemoth SmithKline Beecham. In fact, he was the youngest vice president in the long history of that company, and in 1999 was promoted to CFO.

But Bonfield sealed his own demise at SmithKline, after helping engineer the company’s mega-merger with Glaxo-Wellcome in 2000. Apparently, Bonfield lost out to the Glaxo finance director in a bid for the top finance post of the new drug colossus. In fact, just days after the merger was completed, Bonfield left the company he had faithfully served since 1991.

Now Bonfield’s back in as CFO at rival Bristol-Myers Squibb. It’s nice to see Bonfield back on top. He’s supposed to be a square shooter, and fund managers practically raved about the appointment, with one calling the hire a “great move.” At the very least, with all the bad news these days, it’s nice to see a finance chief being welcomed by a company — rather than hung out to dry.

(Read more about Bonfield’s appointment.)

3. The Osmond Brothers

In remarks made this week, President Bush conceded that the rash of accounting scandals is having a big impact on the markets. “I do think that there is an overhang over the market of distrust,” the President reportedly told reporters.

The President went on to say that “95 percent, or some percentage, huge percentage, of the business community are honest and reveal all of their assets, (have) got compensation programs that are balanced.” But, the chief executive conceded, “there are some bad apples.”

There certainly are (insurance salesmen, Attila the Hun). Interestingly, linguists and etymologysts concede that they’re not entirely sure when the bad-apple phrase first came into use, although they’re guesssing it was somewhere around harvest time. They do point out that the last notable use of the phrase came in 1971, when the Osmond Brothers had a No. 1 hit with “One Bad Apple (Don’t Spoil the Whole Bunch, Girl.”)

President Bush’s comments this week touched off a bit of controversy among the Washington press corps, many of whom seemed confused by the President’s ratcheting up of the number of apples in the bad-apple scenario. When reached for comment, however, Donny Osmond said he believed the President was right about the number of bad apples spoiling it for everyone.

Ironically, the commander-in-chief’s statement triggered a wave of nostalgia for all things Osmond, boosting sales of the brothers’ records, tapes, and lunch pails. Ironically, “One Bad Apple (Don’t Spoil the Whole Bunch, Girl)” actually touched off some controversy of its own when it was released back in 1970 — particularly among the semiotics set. As the well-respected linguist Professor J.S.E. Nahan noted during a heated press conference in June 1972, “Since when do apples come in bunches? What, were these boys raised by numbskulls or something?”

BAD WEEK

1. Scott Sullivan

The WorldCom CFO was fired on Tuesday after the company announced it had uncovered accounting practices that were not exactly consistent with GAAP, or IAS, or even new math. Those “inconsistencies” will force the company to restate recent revenues by nearly $4 billion.

“Our senior management team is shocked by these discoveries,” said John Sidgmore, appointed WorldCom CEO in April. “We are committed to operating WorldCom in accordance with the highest ethical standards. I want to assure our customers and employees that the company remains viable and committed to a long-term future. Our services are in no way affected by this matter, and our dedication to meeting customer needs remains unwavering.”

The company didn’t do so hot by shareholders, however. After the announcement, the stock price of Worldcom dropped to 9 cents a share. Two years ago, WorldCom shares were trading around $62.

Company management says it plans to make up the $4 billion revenue shortfall with a new consumer pricing plan. WorldCom will now charge its long-distance customers 7 cents a minute for the first 10 minutes, $432,000 for every minute after that.

2. Martin Grass, Frank Bergonzi

As CFO.com reported on Monday, Grass and Bergonzi, the former CEO and CFO at drugstore chain Rite Aid, were indicted by the U.S. Attorney in Harrisburg, Pennsylvania.

The Securities and Exchange Commission simultaneously filed accounting fraud charges against Bergonzi and Grass for what federal prosecutors called “a wide-ranging accounting fraud scheme that resulted in the largest earnings restatement ever.” That restatement, of course, now pales next to the rejigging at WorldCom.

Still, Rite Aid’s bookkeeping was bad enough. The “portrayal of Rite Aid as a profitable company was a ruse and a mirage,” according to published citations from the indictment. “The deception was accomplished through massive accounting fraud, the deliberate falsification of its financial statements and intentionally false (SEC) filings.”

One example: The SEC claims that in late 1999, as Rite Aid teetered near bankruptcy, Grass needed to obtain a line of credit to keep the company solvent. When lenders balked, Grass allegedly caused minutes to be prepared for a meeting of Rite Aid’s finance committee. Those fake minutes stated that the finance committee had authorized the pledge of Rite Aid’s stock in PCS Health Systems Inc. as collateral. Grass apparently signed those minutes — even though the SEC says he knew that no such meeting occurred and the pledge was not authorized.

Investigators said they first suspected the finance committee session might be fake after a videotape of the gathering revealed that the meeting was attended by Grass and seven Paddington bears in really small suits.

3. US Bancorp Piper Jaffray

On Tuesday, US Bancorp Piper Jaffray was fined $250,000 and managing director Scott Beardsley was fined $50,000 by the National Association of Securities Dealers. The reason for the fines: The two apparently threatened to drop analyst research of Antigenics Inc. unless the biotech company hired the firm to underwrite a stock offering.

“Brokerage firms and their executives cannot use threats regarding research activities as a way to obtain investment banking business,” said Mary Schapiro, NASD’s president of regulatory policy and oversight.

This is the first case of its kind, said Brian Rubin, a deputy chief counsel in the enforcement division of NASD Regulation, in a statement to a wire service.

You can bet it won’t be the last, however. The cozy relationship between investment banks and the analysts who shill for them is a massive scandal-in-the-making. The recent Merrill Lynch settlement, and now the US Bancorp case, is only the begining. You can already see the lawyers flying lazy circles over Wall Street.

4. Employees

Given the unemployment rate, being out of work these days is a decidedly scary prospect.

Turns out things aren’t so swell for the currently employed, either. A survey released this week by The Conference Board revealed that average salary increases in many key industries dropped below 4 percent for some major employee groups for the first time in nearly a decade.

While The Conference Board found that a majority of workers should expect to see an average 4 percent increase, a higher proportion of all employee groups will get lower increases both this year and next than in preceding years.

This news came on top of a report released last week showing that employers are passing skyrocketing heatlh-care benefit costs on to employees.

In that survey, conducted by the UCLA Andersen Forecast, 75 percent of the respondents said they raised co-payments or deductibles this year. About 65 percent said they raised employee contributions to personal premiums, while 41 percent indicated they increased premiums on coverage for dependents. An additional 12 percent said they waited in the playground for employees, then took their lunch money.