The Economy

Martha and the Vandals

Arthur Levitt back in vogue? Harvey invisible? Debs behind bars? The world's turned upside down.
John GoffJune 21, 2002

Another five days, another round of corporate restatements, scandals, and resignations. Even Martha Stewart got dragged down into the muck and the mire, down there where most of us live and do our laundry. Who made our blotter? Read on.

GOOD WEEK

1. Arthur Levitt

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Looks like the former SEC Chairman was right all along.

As you recall, late in his tenure as Commission Chairman, Levitt launched a dramatic effort to ratcheted up auditor independence rules. Initially, Levitt was intent on banning auditors from performing non-audit services to audit clients. But out in CPA Land, Levitt’s plan triggered a general wailing and gnashing of teeth. Lobbyists for accounting firms insisted the Chairman’s plan was overkill. Indeed, Levitt was practically tarred-and-feathered for even suggesting that conflicts of interest might arise when a company’s independent auditor is also generating billions in consulting fees off that client.

Well, lo and behold, the new SEC Chairman, Harvey Pitt, now seems to be siding with Levitt. In a letter reportedly sent to President Bush, Pitt said he’d like to revisit the issue of auditor independence. In that letter, Pitt apparently wrote that the new rules “could go well beyond those Commission rules adopted in 2000.”

In a related story, the SEC reported this week that every publicly traded company is now under investigation, and nobody move.

2. Small Company CFOs

As any finance chief at a small to mid-side company will attest, credit is in short supply these days.

But that may be about to change. According to a quarterly survey of lenders conducted by Phoenix Management, more than half of the respondents said they expected lending to middle-market and small businesses to rise through the rest of this year. In addition, 45 percent said that lending to large, corporate customers would increase as well.

“This level of enthusiasm for domestic lending is the highest lenders have reported in nearly two years,” said E. Talbot Briddell, president of Phoenix Management Services. “Lenders are clearly sensing at least a mild recovery is underway.”

Not all small companies will be larded by lenders, however. Nearly 60 percent of the respondents in the survey said technology was an industry to which they did not want to lend money. Only start-ups/new ventures were deemed more unattractive as credit risks than tech companies.

When asked which tech sectors were unattractive risks, lenders named E-commerce specialists, mobile and wireless operators, software developers, and companies in the B2D space (business-to-deadbeats).

3. Financial Publishers and Printers
In January, regulators at the SEC suggested that corporate filers start beefing up their management discussion and analysis (MD&A) in their annual reports. Specifically, the Commission wanted that section to include information about liquidity, off-balance-sheet arrangements, derivatives and third-party transactions.

The upshot of all this disclosing and discussing and detailing? This year’s models — that is, annual reports — are a lot bigger than they were last year. As CFO magazine reported this week, General Electric’s annual report was 16 pages longer than last year’s version, including eight additional pages in the financial statement. Says GE spokesman David Frail: “There was about 30 percent more [than in 2000] in terms of word count,” says Frail.

Publishers and printers, hard up for business right now, have to be sending the SEC flowers and bon bons for asking filers to talk more about themselves. Energy company Aquila Inc. added four pages to its report and borrowed additional space for financial disclosures from the front section. When Ethan Hirsh, vice president of corporate communications for the Kansas City, Missouri-based company, called to order more paper and another print run for the new pages, he recalls, “My printer said three out of four of his clients were doing the same thing. Scheduling was very tight for everybody.”

BAD WEEK

1. Harvey Pitt

The week before this one, the SEC chairman turned in one of his better performances. During that five-day period, Pitt gave a speech saying he wanted CFOs and CEOs to be held accountable when they sign off on their companies 10-ks and annual reports. The same week, Pitt and the SEC also called for the creation of an independent board to oversee the accounting profession. Apparently, self-regulation by the industry hasn’t worked out so well.

But on Monday, a report appeared claiming that, in Pitt’s first ten months on the job, the SEC chairman had recused himself from voting in 29 matters before the Commission. In fact, the wire service story indicated that the SEC had recently charged Ernst & Young with violating auditor-independence rules — based on the vote of one commissioner.

Not surprisingly, E&Y, a former Pitt client, is challenging the SEC allegation because it claims the Commission deprived it of a “plural, deliberative process.”

Then again, Pitt’s voting record — or lack of one — may not be all that unusual. Says Patrick McGurn, who works for Institutional Shareholder Services: “The Commission’s barely had enough people voting in recent years, even with no one recusing themselves.”

That lack of senior oversight at the SEC may explain some of the commission’s more-curious recent actions, including its decision to rename the New York Stock Exchange the Chicago Mercantile Exchange.

2. Management at Bristol-Myers Squibb

This week, lawmakers on Capitol Hill began looking into the ugly mess at ImClone Systems.

Specifically The House Energy and Commerce Committee is investigating stock trades made by executives of the company, whose application for FDA approval of its cancer drug Erbitux was rejected late last year.

The House panel is also looking into Bristol-Myers Squibb’s deal to pay $2 billion for a 20 percent stake in ImClone and a share of Erbitux’s profits. The panel is trying to figure out whether the drug giant had enough critical information before it agreed to the arrangement. “The basic problem is how Bristol-Myers can invest so much money for something that appears not valid…” said Representative Clifford Stearns, a member of the House Energy and Commerce./p>

Former ImClone CEO Samuel Waksal was charged last week with insider trading by the FBI and the SEC. And of course, questions have been raised about the motivation for large ImClone stock sales by home-and-garden doyenne Martha Stewart, a friend of Waksal. Reportedly, Stewart’s trades were executed the day prior to the FDA’s decision. Stewart issued a statement saying she had not done anything improper, although she did concede she once wore shoes that didn’t match her bag.

3. Aristotle

Ethics continues to take a beating in the business world. During the week, And the trend doesn’t look like it’s going to let up anytime soon.

According to a poll of 100 senior ethics executives conducted by The Conference Board, a majority of the respondents expect that at least a half dozen more major business ethics scandals will emerge during the next 12 months. Some expect more than 20 major scandals. In case you’re scoring at home, “major” is defined as events causing more than $200 million in lost shareholder value.

More depressing: a majority of these corporate morality officers say that ethics training would not have prevented the collapse of Enron. About 54 percent of those surveyed said that even if Enron’s senior management had received extensive ethics training, it would have made little or no difference in preventing the scandal laden bankruptcy. Only 1 respondent out of 100 believed that, if Enron senior management had received ethics training, the scandal would never have happened. That respondent also thought that ethics training would have prevented continental drift, the sack of Rome, and BayWatch.