Duke Energy Employee Advocate
Washington - Page 7
Auditing or Rubberstamping?The New York Times by Alex Berenson December 6, 2001
Too many publicly traded companies are manipulating their financial results, and auditors, Wall Street and the Securities and Exchange Commission are not doing enough to stop them.
That gloomy verdict comes from lawmakers, former regulators and some investors after the bankruptcy filing of Enron, the largest corporate failure in American history.
For years, complaints about the declining quality of corporate earnings reports have gone largely unheeded. But the sudden failure of Enron, which reported more than $100 billion in sales and $1 billion in profit last year, has generated a new wave of criticism that corporate accounting is out of control.
"We need to see to it that our securities laws and our accounting principles are properly complied with," said Representative John D. Dingell, Democrat of Michigan. "Are you going to tell me that Enron didn't get away with murder?" Mr. Dingell is the ranking Democratic member of the Energy and Commerce Committee, which plans to hold hearings in January to examine Enron's collapse. Enron's fall, after questions were raised about the accuracy of its financial reports, is the latest and largest in a string of accounting-related crises at public companies, including Waste Management, Cendant and Lucent Technologies. Scores of other companies, including giants like Cisco Systems and AT&T, have taken multibillion-dollar write-offs this year, putting their previously reported profits in doubt.
Still others, like Computer Associates, are offering investors pro forma financial statements that are not prepared according to standard accounting rules. Yesterday, the S.E.C. warned investors that pro forma earnings reports should be "viewed with appropriate and healthy skepticism."
Publicly traded United States companies report sales and profits to investors every quarter. Once a year, they release a longer report that must be audited by an independent accounting firm, usually one of the Big Five: KPMG, Arthur Andersen, Deloitte & Touche, PricewaterhouseCoopers and Ernst & Young. The reports are filed with the S.E.C., which can challenge inaccuracies in them.
For two generations, the combination of independent audits and S.E.C. oversight has been considered the best in the world at giving shareholders an accurate picture of the financial health of the companies they own. But the system is near a breaking point, said Lynn Turner, the former chief accountant of the S.E.C. "The average investor is going to be nervous today as to whether these numbers are good or not, and I think he should be in light of what's going on," said Mr. Turner, who left the commission in July to become director of the Center for Quality Financial Reporting at Colorado State University. "My profession has to respond to what's going on, and come back and demonstrate to investors why they should trust us again."
Wall Street analysts and money managers share responsibility for the accounting crisis, said Neil Barsky, managing partner of Midtown Capital Management, a $750 million hedge fund.
Investors have been too willing to buy stocks with strong reported earnings, even if they do not understand how the earnings are produced. Big mutual fund companies like Alliance Capital, Janus Capital and Fidelity Investments, three of Enron's biggest shareholders, have been among the worst offenders, Mr. Barsky said.
"There is a willful cognitive dissonance with investors buying Enron knowing full well that they have no idea what's behind those numbers," he said. "There's a marriage of interest."
A spokesman for Fidelity, which owned 21 million Enron shares as of Sept. 30, said Enron "has not had a material impact on the performance of our funds." Alliance, which owned 43 million Enron shares, did not return calls for comment. A spokeswoman for Janus, which owned 41 million Enron shares, said the company "had a strong process that models companies well and has worked pretty successfully."
Since 1998, there has been a surge in the incidents of large public companies stretching accounting rules, Mr. Turner said. The amount of gimmickry and outright fraud dwarfs any period since the early 1970's, when major accounting scams like Equity Funding surfaced, and the 1920's, when rampant fraud helped cause the crash of 1929 and led to the creation of the S.E.C., he said.
Accounting firms have become too dependent on consulting fees from the companies they audit and are unwilling to risk those fees by challenging corporate managers who stretch accounting rules, Mr. Turner said. Enron paid Arthur Andersen, its auditor, $27 million in fees unrelated to auditing and $52 million in total fees last year, according to Enron's proxy statement.
Last year, Arthur Levitt, then the chairman of the commission, tried to restrict the consulting work that accounting firms could do but backed down in the face of strong opposition from the firms. Mr. Levitt, now a senior adviser at the Carlyle Group, did not return calls for comment.
At the same time, the growth in the securities markets has overwhelmed the S.E.C., Mr. Turner said. "We only had about 20 staff in my whole office," he said.
Gregg W. Corso, a former senior lawyer at the S.E.C., said the commission had lost its focus. In 1937, William O. Douglas, the third chairman of the commission, said it was "the investor's advocate."
Today, the commission sees itself as answerable to many different constituencies, including companies that issue stocks and bonds, securities firms and accounting firms, Mr. Corso said. To keep those groups happy, it has allowed accounting standards to slide.
"You need to listen to them, get their views, but then you have to decisively move ahead," said Mr. Corso, who served as counsel to Mr. Levitt from 1996 to 2000. "Investors need to be extremely wary. There's some fundamental problems that need to be addressed, and I don't think there's the will to do it." A spokesman for the S.E.C. declined to comment.
Over the last five years, Enron used more than a dozen partnerships, some run by its top executives, to move debt off its balance sheet and overstate its earnings by at least $600 million. As Enron's earnings soared, the company's management discouraged analysts and investors from questioning its financial reports, which even friendly stock analysts acknowledged were largely impenetrable.
But after a series of damaging disclosures about its finances this fall, Enron found itself unable to convince investors or its trading partners that its financial statements were accurate, even though they had been certified by Andersen. With its business and stock crashing, it was forced to file for bankruptcy on Sunday. "It's pretty obvious you have two major choices, with possibly a third," Mr. Dingell said. "Arthur Andersen was either corrupt or incompetent. It's possible they were both."
David Tabolt, a spokesman for Andersen, said that Andersen was carefully examining its role in Enron's failure but that Enron's problems were unusual. Andersen audits about 2,500 public companies each year, and "the number of audits where there are questions raised is very rare," he said.
Al Anderson, a senior vice president at the American Institute of Certified Public Accountants, said most audits were accurate. "In a typical year," Mr. Anderson said, "more than 16,000 audits are done before the S.E.C. for public filings 99.9 percent of those audits are high quality."
In a statement yesterday, the heads of the five major accounting firms said that they planned to recommend to the S.E.C. improved disclosure rules for the kind of partnerships that Enron used. In addition, they urged the S.E.C. to encourage companies to give investors more information about their health. "Many different streams of information, not just earnings, are needed for informed decision-making," the statement said. So far, Wall Street has largely shrugged off Enron's collapse, viewing it as an isolated event. Since Oct. 17, when Enron's stock began its precipitous slide, the Standard & Poor's 500-stock index has risen about 3 percent.
"The people who are supposed to be stewarding your capital in your company often have an agenda different than yours," said James Chanos, the short-seller who called attention to the discrepancies in Enron's financial reports. "And the independent entities that are supposed to be watching them are for different reasons falling down on the job. It's not a pretty picture."
Fate's Ups and DownsThe New York Times by Don Van Natta Jr. December 2, 2001
WASHINGTON -- A year ago this week, George W. Bush was the president-perhaps, his future in the unsteady hands of a few Florida canvassing boards. At that time, one of his most generous and stalwart supporters, Enron Corporation of Houston, was a $60 billion corporate colossus, ranked No. 7 in the Fortune 500, with a Texas-sized appetite for growth and even larger egos in its boardroom.
Now, Mr. Bush's approval rating has shot up from 53 percent to nearly 90, and Enron's stock price has bottomed out at 26 cents a share, an almost unimaginable drop from its one-year high of $84.88 a share.
At one time, it seemed that the fates of the two would be entwined. Enron certainly thought so.
Since 1993, the company and its chairman, Kenneth L. Lay, donated nearly $2 million to Mr. Bush. In 2000, it strong-armed many employees to give campaign checks to its political action committee, which helped Mr. Bush get elected. Enron suggested $500 contributions for its low-level managers and at least $5,000 for its senior executives.
This time last year, Mr. Lay kept his fingers crossed as he watched Mr. Bush and his advisers navigate the Florida electoral swamp and kept his fingers crossed. Because if Mr. Bush prevailed, Enron would prevail, too. Right?
Within days of Mr. Bush's inauguration, Enron began enjoying its platinum-status access to the new administration. No one had better access to the Bush administration than Mr. Lay, who never hesitated to brag about his ability to get official Washington to return his calls and embrace his agenda of deregulation.
When the president's advisers debated a new energy policy last spring, Mr. Lay was the only energy executive to meet, alone, with the man spearheading the effort, Vice President Dick Cheney. Mr. Lay even suggested candidates to head the Federal Energy Regulatory Commission.
Mr. Lay relentlessly used his hard-bought political muscle to build new energy markets through the deregulation of the nation's natural gas and electricity industries.
But as questionable investments and accounting practices led to Enron's collapse, the company's friends in the White House focused on much more pressing issues remained reticent. Some Enron employees hoped for a helping hand from one of the them, but none ever came.
"The company has become a pariah" in Washington, an Enron executive complained a few weeks ago. "The Bush administration doesn't want to have anything to do with us."
Last spring, as Enron was continuing to thrive, Mr. Lay seemed to sense that there were limits to having a close friendship with the president. "It could hurt," he said, "from the standpoint that, at some point, they lean in the other direction to make sure they don't face criticism."
And now, Mr. Lay's corporation has entered the final phase of a spectacularly fast free-fall that is unlike any in recent American corporate history.
The only thing Mr. Lay's old pal in the White House can do is watch.
FBI Energy Attack WarningAssociated Press by H. Josef Hebert November 27, 2001
WASHINGTON The FBI has warned energy companies that Osama bin Laden may have approved plans to attack North American natural gas pipelines and facilities if he's captured or killed, a warning that prompted a tightening of security.
Natural gas producers and pipeline companies continued to be on a high state of alert, industry executives said Monday, although they declined to discuss the latest warning, which was sent in a memo to industry security officials last week.
Attorney General John Ashcroft confirmed the warning, though he expressed some doubt that attacks would be conditioned on bin Laden's capture or death.
"It didn't take anything specific to trigger the attacks on the World Trade Center or the Pentagon," said Ashcroft when asked about the alert at a news conference. Even so, "those are the kinds of reports which we take seriously." The alert did not single out a specific target, but referred to natural gas supplies including the more than 260,000 miles of gas pipelines and hundreds of pumping stations and other facilities.
"We have received uncorroborated information that Osama bin Laden may have approved plans to attack natural gas supplies in the United States," said the memo, according to several industry sources, who spoke on condition of anonymity.
"Such an attack would allegedly take place in the event that either bin Laden or Taliban leader Mullah Omar are either captured or killed," the alert continued.
The FBI alert said the information came "from a source of undetermined reliability" and that "no additional details on how such an attack would be carried out, or which facilities would be targeted" could be learned.
Since the Sept. 11 terrorist attacks, the energy industries including operators of nuclear power plants, refineries, pipelines and power grids have scrambled to increase security on a belief that they could be singled out for another round of attacks.
One industry source characterized the FBI warning as similar to one issued earlier this month on potential attacks against West Coast bridges that prompted security alerts. In that case, no further evidence of potential terrorist activity emerged.
The alert was sent on Nov. 17 from FBI headquarters to agency field offices, which then forwarded the information to industry officials. The alert prompted the American Petroleum Institute, which is the lead industry group coordinating with the FBI and Energy Department on security matters, to issue a memo last Wednesday to oil and gas companies.
Energy industry executives were reluctant to discuss the latest alert, or their security measures, although several confirmed the memo and said additional precautions have been taken. Still, the potential for a terrorist attack has left some industry officials jittery.
"We prefer to keep a low profile," said an official of one of the largest natural gas pipeline companies, agreeing to speak only on background so that the company would not publicly be singled out.
"Our facilities are on high alert and they have been since Sept. 11," said Laurie Cramer, a spokeswoman for the Natural Gas Supply Association, which represents natural gas producers.
There are 263,000 miles of natural gas transmission lines crossing the country and another million miles of local distribution lines. Although most of the lines are buried, aerial surveillance of major pipelines has been increased and security tightened at pumping stations, industry officials said.
Access to facilities has been restricted as well, officials said. Also, some detailed information about location of pipelines and other energy infrastructure has been taken off some corporate and government Internet sites.
But the industry is in a quandary over how much information should be withheld about the location of pipelines, which often must be clearly marked to prevent someone from accidentally rupturing one when digging. The availability of maps also has helped to promote acceptance of pipelines in communities.
"We want people to know where they are" to prevent accidents, said Benjamin Cooper, executive director of the Association of Oil Pipe Lines. But he acknowledged the desire for public disclosure now is being tempered somewhat for security concerns.
"The biggest danger to natural gas pipelines on an ongoing basis is (the line) being hit by a backhoe or heavy equipment," said Kelly Merritt, a spokesman for Columbia Gas Transmission Corp., one of the country's biggest pipeline companies.
While a rupture of a gas or oil pipeline could cause significant problems, industry experts emphasized that most lines are relatively isolated and even a major break in a line can normally be repaired fairly quickly.
California Court Upholds Free SpeechPublic Citizen Press Release November 27, 2001
WASHINGTON, D.C. -- A California appellate court has decided for the first time that criticism of public companies on Internet message boards are protected from frivolous litigation by California's anti-SLAPP statute. This echoes the position taken by Public Citizen -- that companies should not be permitted to use lawsuits, or the threat of lawsuits, to silence Internet critics.
In March 2000, Computer XPress, a California company that sells computer-related products, sued one of its competitors over, among other things, criticisms expressed on Internet bulletin boards and in a complaint to the SEC. The trial judge decided that none of the issues in the case pertained to issues of public interest that were within the protection of the anti-SLAPP statute (Strategic Litigation Against Public Participation). That law recognizes that First Amendment rights are threatened by the financial hardship and chilling effect of defending a frivolous lawsuit.
Under the law, cases filed to deter public participation must be dismissed immediately, and the plaintiff (usually a company) must pay the defendant's attorney fees unless the company can show a reasonable probability that it can win the case. The promise of a quick dismissal, with a payment of attorney fees, was seen by the California legislature as critical to ensuring that people would not refrain from speaking to avoid a lawsuit even if they could win their cases in the end.
In an unpublished decision issued earlier this year, the Court of Appeal in Riverside decided, in agreement with a Los Angeles federal trial judge, that statements made on an Internet bulletin board about a company whose stock is publicly traded are a matter of public interest and thus are protected by the anti- SLAPP statute. The court further decided that the mere fact that the speaker may be a competitor of the plaintiff does not mean that it is not expressing its free speech rights.
Attorneys for Public Citizen, which had not previously been involved in the case, intervened to ask the Court of Appeal to publish its decision so all citizens of California could benefit from the holding. Under California law, unpublished appellate decisions cannot be cited as precedent, but published rulings of an appellate court in one part of the state are binding on state court trial judges throughout the state.
In a Nov. 15 decision, the court reconsidered its prior ruling and decided to make its position binding precedent. The new ruling, Computer XPress, Inc. v. Jackson, No. E027841 (Cal. App., 4th Dist. Div. 2), is available at http://www.courtinfo.ca.gov/opinions/documents/E027841.PDF
The ruling represents an important protection of the public's free speech rights, said Public Citizen attorney Paul Alan Levy, who has defended a number of individuals sued over their Internet postings.
"Many public companies have used litigation and the threat of litigation to intimidate individual investors and other members of the public who might have the audacity to criticize them," Levy said. "It is too easy for companies to allege that their critics are ill-motivated as a way of avoiding coverage by the anti-SLAPP statute."
In that same opinion, the Court of Appeal reconsidered its original decision that, if even one part of a complaint can be upheld as outside the protection of the anti-SLAPP statute, the defendants lose their right to have their fees paid by the plaintiff. Under the new ruling, fees must be paid for that part of the case that has been stricken under the anti-SLAPP statute.
"This part of the ruling forces companies to choose their claims carefully and sue a critic only when they are sure that they have a good chance of proving that the speaker abused his free speech rights," Levy said.
The defendants in the Computer XPress case were represented by Yvonne Renfrew, a lawyer in Los Angeles. Public Citizen asked to have the ruling published because the organization champions free speech rights. Public Citizen recently represented two people who posted criticisms about Hollis-Eden Pharmaceutical Company on a Yahoo! bulletin board. The rulings in that case, which supported Public Citizen's position, are on appeal
Congressman Doggett Smells a ScamThe Austin Chronicle by Lauri Apple November 25, 2001
In case you're fallen a few steps behind the post-Sept. 11 grieving curve, national trendsetters in the Bush administration, Congress, and lobbyist circles say it's time to forgive and forget -- payment of taxes by corporations, that is. General Motors, Boeing, International Paper, and other billionaire behemoths are so emotionally distraught about the tragedies, it seems, that they are asking for repeal of the corporate alternative minimum tax (AMT) -- and many on Capitol Hill feel their pain.
Not only do the corporations say they need a $200 billion tax break to feel better again, but also a rebate on taxes they paid during the past 15 years. Despite the country's unstable economic situation, energy and oil corporations -- many based in Texas -- stand to win back millions. According to the nonprofit Citizens for Tax Justice, Texas Utilities would get $608 million and Enron $234 million. "It's sort of a free-for-all," American League of Lobbyists President James Albertine recently gushed to The New York Times. "It could be a long dry spell before anything like this comes around again."
The Times also reports that the administration and Congressional Republicans have given business leaders "red-carpet treatment," and that Democratic leaders have also been responsive. "It's like squirrels running around finding acorns and putting them in the ground for winter," said Albertine. But Rep. Lloyd Doggett, D-Travis County, avows he won't join the holy (red carpet) rollers any time soon. "To the clarion call of President John F. Kennedy, 'Ask not what your country can do for you, ask what you can do for your country,' these special interests have responded, 'How big is my tax break rebate check?'" Doggett said. The Congressman says he fought AMT repeal as a member of the Ways and Means Committee and during the Oct. 24 floor debate on "economic stimulus" legislation. "Labeling corporate loopholes and tax dodges as an 'economic stimulus' is merely an excuse for enacting an agenda that is only designed to stimulate the pocketbooks of the biggest corporate campaign contributors," Doggett said.
Bitten by CobraEmployee Advocate http://dukeemployees.com November 13, 2001
The Consolidated Omnibus Budget Reconciliation Act (COBRA), of 1986 gives employees the right to maintain health insurance during job transitions. As far a providing any real benefit to workers, Cobra is just another snake in the grass. It is just words that imply some benefit, while delivering very little.
Robin Toners article in The New York Times reveals just how little Cobra has to offer. It does not cover the employees of many small businesses. Those eligible for Cobra often find the rates to be unaffordable. It can cost $500 to $600 per month in premiums!
Ron Pollack, executive director of Families USA, said: "The vast majority of the public doesn't understand the problems associated with Cobra. Cobra provides a very crucial right for recently laid off people, but it is unaffordable for the intended beneficiaries to exercise that right."
Worker Who Died Suspected AnthraxThe New York Times - by David E. Rosenbaum November 9, 2001
WASHINGTON, Nov. 7 Hours before he died here last month from inhalation anthrax, a postal worker called 911 for an ambulance and, clearly afraid, told the emergency operator he suspected he had anthrax because he remembered that colleagues working near him the week before had handled a letter with powder in it. Postal officials said tonight that the letter recalled by the worker, Thomas L. Morris Jr., had been immediately turned over to the F.B.I. and sent for anthrax tests that proved to be negative.
In a tape recording of the 911 call, Mr. Morris told the dispatcher: "Now I'm having difficulty breathing. And just to move any distance I feel like I'm going to pass out."
He also said, "I don't know if I have been, but I suspect that I might have been exposed to anthrax." He also complained that he could not get information from the Postal Service about the substance found in the letter and said he had a "tendency not to believe" his employer.
So far, the authorities have found only one letter here containing anthrax the one sent to Senator Tom Daschle, Democrat of South Dakota, and opened in his office on Oct. 15. But millions of pieces of mail that have been sent for disinfecting have yet to be examined for anthrax.
Then the operator asked whether he knew what happened to the letter.
Mr. Morris replied: "I don't know anything. I couldn't even find out if it if the stuff was or wasn't. I was told that it wasn't, but I have a tendency not to believe these people."
The operator ended the call by saying an ambulance was on the way.
Deborah Willhite, a senior vice president of the United States Postal Service, said tonight that postal authorities had not known of the 911 call until it was played on television but that they were familiar with the letter in question.
Ms. Willhite said: "When the letter was called to the supervisor's attention, the supervisor set it aside and turned it over to the inspector on duty. The inspector gave it to the F.B.I. The F.B.I. sent it to be tested. It tested negative." Ms. Willhite said employees at Brentwood were told "in a stand-up talk" of the negative results of the test.
The memorandum describing anthrax symptoms that Mr. Morris mentioned was one the Postal Service sent to all employees in early October, Ms. Willhite said.
If the test was accurate and the letter Mr. Morris saw did not contain anthrax spores, then he must have caught the disease from the letter sent to Mr. Daschle or from another contaminated letter that has not been found. The letter with anthrax spores was opened in Mr. Daschle's office on Oct. 15.
People in and around Mr. Daschle's office were immediately given antibiotics, and none have become sick. But postal workers were not given antibiotics until a week later. Postal officials have said they were relying on advice from the Centers on Disease Control and Prevention that postal workers were not in danger.
Bioterrorism Response Must be Open to the PublicPublic Citizen - Press Release November 9, 2001
WASHINGTON, D.C. -- A pharmaceutical industry task force established at the behest of Health and Human Services (HHS) Secretary Tommy Thompson to develop government responses to bioterrorism violates a federal law on the transparency of decision-making committees, Public Citizen said in a letter delivered today to Thompson.
The Federal Advisory Committee Act (FACA) requires that committees involving outside experts that directly shape government decisions have a balanced membership and clearly defined purpose, and that their meetings be open to the public. The Pharmaceutical Research & Manufacturers of America Emergency Preparedness Task Force, appointed in the wake of the terrorist attacks, is violating this law, Public Citizen said.
"We understand that HHS is taking on the difficult job of determining how to protect our nation from the threat of bioterrorism," director of Public Citizen's Health Research Group, Dr. Sidney Wolfe wrote in the letter. "At the same time, the rule of law must be observed. . . . The pharmaceutical executives who make up the Task Force plainly have expertise, but they also have powerful economic self-interests in shaping government policy on this topic."
Representatives of Abbott Laboratories, American Home Products, Bayer, Bristol-Myers Squibb, Eli Lilly, GlaxoSmithKline, Johnson & Johnson, Merck, Pfizer and Pharmacia are part of the task force, which is headed by Richard Markham of Aventis. In recent weeks, pharmaceutical company executives have been meeting regularly with Bush Cabinet members. But under the law, a federal agency that uses such an advisory committee must file a charter with the agency and appropriate members of Congress. The charter must set forth the committee's objectives, scope of activities, the time it will take to carry out its purposes and a description of its duties. Notices of meetings must be published in the Federal Register, and meetings must be open to the public with an opportunity for public participation. None of this has been done.