The Economy

Five Empty Boxes, and More

Microsoft settles, risk managers unsettled, and an auditor scorned. Plus: Tyco's shipping news.
John GoffJune 7, 2002

Who had a swell week? Who had a lousy week? Read on, MacDuff.


1. Arthur Krause

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This week, Sprint Corp. announced that CFO Arthur Krause is retiring. Krause, 60, deserves a little golf time. He started at Sprint 31 years ago. 31 years. To give you an idea: when Krause first started at Sprint, the company’s entire long-distance service consisted of two carrier pigeons named Gus.

By all accounts, Krause has done a masterful job at Sprint. He took over as the company’s finance chief in 1988. Over the past fourteen years, the company’s sales have skyrocketed. Last year, despite a down market for telcom providers, Sprint reported net operating revenues of $26 billion.

Observers say Krause played a crucial part in growing Sprint into one of the largest phone companies in the world. Robert Dellinger, one time CFO of General Electric Motors, will replace Krause. He’s got some big shoes to fill.

In case you’re wondering, Sprint started out as the Brown Telephone Company in Abiline, Kansas in 1899. It did so.

2. Shareholder Activists

The Nell Minnow/CalPers set finally had something to cheer about. On Thursday, both Nasdaq and the New York Stock Exchange came out with stricter regulations for corporate governance.

It’s a long time coming. Between analysts apparently shilling for their investment banking colleagues, and CEOs treating off-balance sheet vehicles as personal cash machines, investors have been taking it square in the teeth lately. What’s really annoying, however, is that many C-level executives seem to have lost sight of a basic tenant of governance: shareholders own the joint.

Whether the proposals from Nasdaq and NYSE make a difference remains to be seen. Both proposals, which need to be approved by the SEC, address board and auditor independence. It may be days late — and billions of dollar short — but it’s a start.

3. Borrowers

According to Standard & Poor’s, the corporate default rate, as well as the number of companies suffering major credit problems, is starting to decline.

The 12-month junk bond default rate for U.S. companies fell to 9.57 percent in May from 10.26 percent in April, according to the credit rating agency. The default rate for European Union countries fell to 10.95 percent from 11.68 percent.

Currently, $19 billion worth of rated bonds are currently in a precarious credit position described as the “weakest links.” But that’s still less than the $24 billion of weak-link debt in April, $34 billion in January.

“The decrease in the number of weakest links supports the declining default rates,” says Diane Vazza, head of S&P’s global fixed-income research, said in a report. She’s looking for a “moderate deceleration in defaults” throughout 2002.


1. Microsoft

On Monday, Microsoft Corp. agreed to cease, desist and just plain stop from committing accounting violations and other violations of federal securities laws.

Apparently, the Securities and Exchange Commission found that Microsoft had maintained seven reserve accounts in a manner that did not comply with Generally Accepted Accounting Principles (GAAP). “More particularly, the Commission found that these reserves did not comply with GAAP because, to a material extent, they did not have adequately substantiated bases.” The SEC said Microsoft’s inadequately substantiated bases led the company to misstate its income in filings made between July 1, 1994, and June 30, 1998. That’s a lot of misstatements.

Moreover, the Securities and Exchange Commission found that Microsoft did not properly document the bases for these accounts. In addition, the Commission said Microsoft failed to maintain proper internal controls, filed statements that did not comply with GAAP, and overstated income. The regulatory agency also said Microsoft managers lied about their SAT scores and were mean to cats.

2. L. Dennis Kozlowski

On Tuesday, the CEO of embattled conglomerate Tyco Intl. resigned from the company amid rumors that he was under criminal investigation. The next day, Kozlowski was indeed indicted by New York state for allegedly conspiring to avoid paying sales tax on paintings by such masters as Claude Monet and August Renoir. Kozlowski has since pleaded innocent to the charges.

Manhattan District Attorney Robert Morgenthau charges that Kozlowski conspired with art dealers and Tyco employees to dodge an 8.25 percent sales tax. Allegedly, Kozlowski managed this neat trick by making it look as though paintings he purchased in New York were shipped to Tyco offices in New Hampshire. But according to the indictment, the Tyco CEO didn’t ship the paintings anywhere. In fact, Morgenthau claims Kozwloski once instructed a truck driver to deliver five empty boxes to New Hampshire.

According to Morgenthau, the scheme saved Kozlowski $1 million. Reportedly, the Tyco CEO earned $450 million in stock and compensation over the past four years.

Prosecutors say they were tipped off to the alleged shipping scam by a UPS clerk, who claimed Kozlowski once asked for extra bubble wrap, but then didn’t do anything with it.

3. Risk Managers

Risk managers already have their hands full trying to protect against sophisticated and devastating network attacks conducted by terrorists and black-hat hackers.

Unfortunately, a new survey reveals that they really should be watching out for Marge in Accounting. According to a poll conducted at the Gartner Information Security Conference, 80 percent of all network security managers surveyed claim their biggest security threat comes from — yup — their own employees.

According to the survey, 58 percent of the respondents claim the careless use of personal communications by their employees pose the most dangerous security risk to their networks. Specifically, more than half of security breaches are caused by personal use of company computers. Personal E-mails and instant messaging are two of the biggest culprits.

The security experts also revealed that the three most common Internet search words/phrases typed by employees during office hours are “healthcare,” “compensation,” and “all-naked bowling.”

4. Peregrine Systems

It’s bad enough that senior executives at Peregrine Systems has apparently gotten on the wrong side of regulators at the Securities and Exchange Commission. Now, it appears they’ve annoyed their former bookkeeper.

According to press reports this week, auditor KPMG recently sent a letter to the SEC indicating that Peregrine’s problems could be a lot more serious than the company has so far let on. Reportedly, KPMG claimed that Peregrine engaged in accounting practices that “indicated possible fraud.”

Specifically, KPMG is believed to have accused Peregrine of making “side agreements” with customers, allowing them to not pay for software they were agreeing to purchase. According to reports, KPMG also informed the SEC that Peregrine understated the purchase price of an acquisition, wrongly booked deals with extended payment terms, and inexplicably fired the best damned auditing firm in America.