Rate of Restated Earnings Up at L.A. Companies
By ANTHONY PALAZZO
WorldCom and Enron aren’t the only companies with accounting issues.
Mirroring a national trend, L.A. companies have been restating their numbers at a growing rate over the past five years, according to data compiled for the Business Journal by Huron Consulting Group of Chicago.
In Los Angeles County, eight publicly held companies issued earnings restatements in 2001, up from two in 1997. There were 25 restatements by L.A. County-based companies over the last five years, out of 79 in Southern California.
In Southern California, restatements actually fell in 2000 and 2001, while national figures show a 25 percent rise.
Sectors producing the highest number of locally based restatements include computer software and manufacturing industries and “trade” including retail and other sales-related businesses.
Software, which accounted for 20 percent of L.A. County restatements, and manufacturing (24 percent) tracked broader trends statewide and nationally, said Joseph J. Floyd, a director with Huron Consulting’s forensic accounting and special investigations team. Improper revenue recognition is the leading cause of restatements in both industries nationwide, and it was the leading reason for restatements among L.A. companies overall.
Unlike the more notorious cases in the headlines, most companies doing the misstating are smaller a statistic that’s magnified in Southern California, where companies under $100 million in annual revenues accounted for 80 percent of the restatements. Herrick suspects that the smaller companies are picking up accounting tricks first developed by larger companies with huge consulting budgets.
Nationally, half of all restatements came from companies under $100 million in revenue, Huron Consulting found although measuring by total revenues, smaller companies performed better than larger ones.
“There is some discussion around whether we have enough talented people to fill the accounting and finance positions at public companies,” Floyd said.
Among the 25 local companies issuing restatements were Guess Inc., PS Business Parks and Certified Grocers of California, a grocery cooperative that merged in 1999 into what is now privately held Unified Western Grocers.
Officials at PS Business Parks and Certified Grocers couldn’t be reached for comment.
At Guess, which last year restated its quarterly results for three periods in 2000, the company said in regulatory filings that certain inventory accruals and costs of goods sold were incorrectly reported, as were certain rent expenses. The company declined to comment further.
California tops list
California was the state with the most restatements nationwide over the five-year period, at 178, but the rate of restatements places it 11th among all states in the past five years. Statewide, 40 companies restated their results in 2001, flat with 2000 and down nine from 1999.
Software accounted for 30 percent of restatements in California over the five-year period, while manufacturing made up 24 percent.
Revenue recognition was by far the greatest accounting issue in the state, a factor in 45 of the restatements in the five-year period.
Restatements appear to be heading for further rises, both nationally and locally.
Six months into 2002, at least local two companies have issued restatements: Homestore.com Inc. has said it overstated reported revenue in 2000 by $41.4 million due to improper recognition of revenue on barter transactions. L90 Inc. had to reduce its stated revenues for 2000 and 2001 by $8.3 million.
Another local company, National Golf Properties Inc., restated previously reported results of a closely held affiliate, American Golf Corp., to align the companies’ accounting treatment of lease payments from American to National Golf.
Two others have come under fire for their accounting policies. Pasadena-based Gemstar-TV Guide International Inc. booked contested revenues totaling $114 million related to on-screen programming guides, on the assumption it would win ongoing federal and International Trade Commission lawsuits against Scientific Atlanta Inc. and others. On June 21, Gemstar lost a round at the ITC, but the cases will take time to resolve. A company spokeswoman, Lauren Snyder, said it’s premature to address the question of a writedown.
“I don’t know what they’re going to do, but there’s definitely a chance that they would restate,” said Stacy Bingler Forbes, an analyst with Janco Partners Inc. She termed Gemstar’s accounting “aggressive,” but “in no way fraudulent.”
Allegations at Global
Bermuda-based telecom firm Global Crossing Ltd., whose corporate offices were shifted from Beverly Hills to New Jersey earlier this year, has been accused by a former finance executive of utilizing capacity swaps to inflate measurements of revenue and cash flows.
A special committee of Global Crossing’s board is investigating the allegations, as are the Securities and Exchange Commission and other authorities.
On a national level, a proposal circulating in Congress to mandate the periodic change of audit firms at public companies could cause “a world of chaos,” Floyd said. His group, which recently joined Huron from Arthur Andersen, has worked on major restatement assignments such as Lernout & Hauspie Speech Products NV, Microstrategy Inc., and AOL Inc. before it merged with Time Warner Inc.
Historically, a change in auditors often has coincided with company restatements; Huron is studying whether these observations hold up statistically.
Some in the accounting industry have said that the impending demise of Arthur Andersen, and its replacement as auditor to 2,000 public companies in the U.S., will boost restatements. In the current climate, the thinking goes, it’s unlikely that the new auditors will go out on any limbs to protect a questionable accounting policy that may have been blessed by Arthur Andersen.
The hard line taken by WordCom’s recently appointed accountants, KPMG LLP, was key in the board’s decision to fire its chief financial officer, Scott D. Sullivan, and reject his explanation for the $3.8 billion in expenses that the board found to be improperly categorized. Andersen was WorldCom’s former auditor, but it said it was never consulted on the items in question.
What worries Tracy Herrick, chief investment strategist with Jefferies & Co., is the changing nature of the restatements.
In the past, financial restatements often occurring after major changes in accounting policies have tended to help increase ongoing earnings, Herrick said. “The kind of restatement we’re talking about today is where something has been discovered that is improper.”
Herrick is concerned that U.S. stocks already the most overpriced market in the world are beginning to face an exodus of foreign investment and capital.
As foreign owners sell U.S. stocks, they’re also selling dollars on the world market, driving down the price of the currency, Herrick said. If it continues, it could mean a resurrection of inflation, and higher long-term interest rates an event that would spread the misery from Wall Street to Main Street.
“The intensity of the animosity is going to be a powerful political force, and there’s going to be some recognition of what investors will consider to be justice,” Herrick said. “That could mean, and probably means, that somebody has to go to jail.