Financial Accounting Blog

Monday, May 31, 2004

Former CEO of Rite Aid has been sentenced to serve eight years for his part in an accounting scandal and coverup.
Grass took control in 1995 and began an acquisition spree. Rite Aid grew from 1,618 stores and $943 million in debt in 1995 to 3,821 stores and $4.1 billion in debt by 1999.

But the grand jury said the boom years were accomplished by 'massive accounting fraud, the deliberate falsification of financial statements, and intentionally false SEC filings. Less than a year after Grass left the company, the new management team restated the company's net earnings for 1998 and 1999, reducing them by $1.6 billion. Rite Aid recently recorded its first profits since the Grass years.

Friday, May 28, 2004

Auditors may increase focus on reporting of environmental issues. An article in Accountancy magazine implies that major auditing firms may increase their scrutiny over reporting of environmental and other non-financial issues.

The Big Four and the accounting bodies agree that non-financial information, including environmental issues, should take greater precedence in companies' reporting procedures.
David Phillips, a partner at PricewaterhouseCoopers, stressed to Accountancy: 'Companies are realizing that non-financial information has an effect on corporate reputation, and in convincing investors that management is running the company properly. ... I think we are going to see more pressure on companies, particularly from the legislative world, to better articulate the area of environmental performance, in particular to make clear the financial implications of the environmental issues facing a company.'

HealthSouth. Healthsouth's lack of audited statements puts them at risk of bankruptcy even though they have good cash flow. This article says that small shareholders are raising questions about Franklin Mutual Advisors Senior Vice President Michael Embler and his purchasing of HealthSouth's debt.
Embler is known as an aggressive scavenger who favors the debt of struggling companies like Qwest and WorldCom. His fund scooped up HealthSouth bonds early last year, when the healthcare chain revealed a multibillion-dollar accounting fraud, and has since assumed a prominent role in a bondholder fight against the company. His group is seeking a big wad of cash to keep them from accelerating debt payments -- and triggering a possible bankruptcy -- under a technical default caused by the company's lack of audited financial statements. The group, known as the Unofficial Committee of Bondholders, has so far refused HealthSouth's cash offers as "clearly insufficient" and has accused the company of employing "strong-arm tactics" instead of negotiating in good faith with its creditors.

Tuesday, May 25, 2004

According to the SEC has issued the largest fine ever for noncooperation to Lucent and its executives.
The Securities and Exchange Commission fined Lucent Technologies Inc. $25 million for not cooperating with an investigation of its accounting practices and charged 10 executives with securities fraud and helping Lucent violate federal securities laws.

This is the largest penalty imposed on a company for not cooperating with an SEC probe.

Congress vs. FASB. Robert Denham, the Chairman of the Financial Accounting Foundation is expressing grave concern
over the approval of H.R. 3574 “The Stock Option Accounting Reform Act,” by the Capital Markets, Insurance and Government Sponsored Enterprises Subcommittee of the Committee on Financial Services.

“Advancing this bill in the legislative process harms the credibility of America's system for providing transparent and unbiased financial information to investors,” Denham said. “By inserting Congress into the setting of standards for accounting by publicly traded companies, H.R. 3574 would undermine the independence of the Financial Accounting Standards Board (FASB), which Congress recently reaffirmed in the Sarbanes-Oxley Act.”
Denham argues that if special interests believe they can push Congress to pass bills that go against independent accounting principles the accounting system will be compromised.

Monday, May 24, 2004

International Standard for Revenue Recognition. Reuters reports that the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB)agree that revenues should be recognized based on fair market value, however, there is no consensus on how fair market value is to be determined.
The approach being considered will allow investors to gauge a company's revenue stream by looking at the changed values of assets and liabilities reported in the balance sheet, rather than looking at 'revenues' in the income statement as is done today. . . . transactions will be recognized as positive revenue generators only if they increase assets or decrease liabilities. The company would have to spell out the fair value, or latest market value, of the asset or liability on a given date.

However, the proposal is not free of obstacles. FASB and IASB officials say they have yet to figure out the best approach to arrive at the fair values. "This is the most difficult part and we are still looking at this problem," said an IASB official who requested anonymity.

Contingent Liability. Citi takes $5 bln charge for WorldCom, other issues. Citigroup sets up a reserve for litigation by recognizing a loss or expense on the income statement and creating a liability for future payments on the Balance Sheet.
The balance of the $4.95 billion after-tax charge will be added to Citigroup's reserves for future settlements, and brings that kitty to $6.7 billion. Prince says most of that reserve is earmarked for Enron litigation.

Thursday, May 20, 2004

Recently Intel stockholders have been talking about listing employee stock options as an expense. This article from save stock options argues that the cost of employee stock options should not be reported as an expense on a company's income statement.

Monday, May 17, 2004

Why do so many companies incorporate in Delaware? Professor Bainbridge reviews the literature on this topic. Is it a race to the top or a race to the bottom?

Friday, May 14, 2004 asks whether locating the corporate headquarters in a small city increases the risk of fruadulent financial reporting.
'If you're in New York City and someone asks you to do something you don't feel comfortable with, you can do a dozen interviews in a 12-block radius. That gives you some bargaining power,' says Breeden. 'That's not going to happen if you're out in the boonies somewhere.'

Monday, May 03, 2004

Aggressive Accounting reports that despite the Enron and Worldcom fiascos less than three years ago CFO's are still facing significant pressure to cook the books.
"Nearly half — 47 percent — report they still feel pressure from their superiors to use aggressive accounting to make results look better....Of those who have felt pressure in the past, only 38 percent think there is less pressure today than there was three years ago, and 20 percent say there is more."
Despite this troublesome news, over three-quarters of the respondents to the survey felt that Sarbanes-Oxley, despite creating more work and added cost, has made it easier to withstand pressure from their superiors.

Stock Options. reports that Safeway, the country's #3 grocer, has bowed to shareholder pressure and will begin to expense stock options in 2005.
Safeway Inc., bowing to pressure from a shareholder revolt over corporate governance concerns, on Monday said it would name three new independent directors and begin expensing stock options next year. Safeway also said it is committed to expensing stock options in 2005, a demand which the public pension funds had accused the company of ignoring even with a majority vote backing the move last year.

Forbes reports Global Crossing Ltd has named Deloitte & Touche as their new accounting firm.
The developments come less than a week after the embattled telecommunication network company said it would restate 2003 earnings, review its 2002 results and delay reports for this year.

The Bermuda-based firm, which recently emerged from bankruptcy protection, said it understated liabilities for access charges -- fees paid to other phone companies for connecting calls -- in its 2003 financial statements by $50 million to $80 million.

Sunday, May 02, 2004

Vault provides some history on the development of FASB, including the dissolution of APB. APB was replaced by FASB in 1973 due to
"charges of a lack of productivity, a failure to act quickly in correcting abuses, a strong level of dissention from CPA firms and occasional government intervention"

A yahoo financial news article reports that PepsiCo Inc.'s soft drinks and snacks divisions may face civil action from U.S. regulators over dealings with retailer Kmart Holdings Corp., the world's No. 2 soft drink company said on Friday. Regulators are probing documents signed by a Pepsi-Cola employee and another at Frito-Lay, PepsiCo said. The documents are suspected of giving incorrect timing of revenue that Kmart generated from those businesses, PepsiCo said in a statement.
In a statement, Kmart said it learned of the improperly recorded vendor allowance transactions during a review completed in early 2003, before Kmart's May 2003 emergence from Chapter 11 bankruptcy protection. Kmart said it cooperated with federal regulators in that review, and fired all employees it deemed responsible.

A yahoo financial news article reported that Ohio power company DPL Inc. on Friday said it would suspend paying a dividend until its audit committee completes a review into concerns raised by a senior executive.
the delay in filing its financial statements had resulted in additional non-compliance with reporting requirements under some of its other indentures and material debt agreements.

This article reports that the Securities and Exchange Commission launched an investigation into the Bally Total Fitness Holding Corp's recent restatement, which stemmed from the timing of the recognition of pre-paid dues.
Bally revised its 2003 results in March to correct revenue errors amounting to about $43 million over seven years. According to the company, the revenue errors accelerated dues recognition for certain prepaying members. The $43 million was part of a $675 million non-cash charge related to a 2003 change in the company's accounting system in 2003, added the fitness-club operator. reports a recent example of the complexities of accounting rules for international companies such as British Petroleum. Perhaps international accounting rules are in order?
Lord Browne said he feels that oil companies could end up producing two sets of reserve numbers, one based on SEC guidelines and another in compliance with their national rules, such as Britain's Statement of Recommended Practice, according to the newspaper.

A CNet article reported Thursday that telecommunications equipment giant Nortel has fired both their CEO and CFO after the company performed an in-depth review of accounting practices. This article shows once again how financial reporting has come to the forefront of the business world.
"The management shakeup comes as Nortel conducts an internal investigation of its accounting practices. Nortel's internal auditors began looking into the company's finances after it was discovered that roughly $900m in liabilities had been either recorded incorrectly in prior periods or had not been properly released in the appropriate periods."

Saturday, May 01, 2004

Did Some Investors Know about 9-11 in Advance? A person who knew about 9-11 in advance could have profited by buying Put options on the market. A put is the right to sell a stock to another person at a fixed price. After making a large investment in Put options, the person would wait for the predictable decline in stock prices following the attacks. The Put options would then skyrocket in value. Finance professor Allen Poteshman has examined behavior in the options market leading up to the 9-11 terrorists attacks.
When the option market activity in the days leading up to the terrorist attacks is compared to the benchmark distributions, volume ratio statistics are seen to be at typical levels. An indicator of long put volume, however, appears to be unusually high which is consistent with informed investors having traded in the option market in advance of the attacks.