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Auditor reportedly knew about company's accounting peculiarities; ''there was no problem.'' Plus: PCAOB riles foreign auditors. And: what's wrong with corporate websites? Plenty.
Craig Schneider, CFO.com | US
April 25, 2003
Got accounting discrepancies? No problem.
Or, that's what auditors from Ernst & Young seem to have told HealthSouth officers after learning last June about apparent discrepancies in the company's financials. This, according to reported testimony in federal court on Wednesday.
E&Y auditor James Lamphron testified that former HealthSouth asset manager Michael Vines sent an e-mail to the auditor, complaining about the company's "misallocation between asset and expense accounts." According to a Reuter's report of the testimony, Lamphron also stated that he informed former finance chief William Owens — who has since agreed to plea guilty to fraud charges — and George Strong, head of the HealthSouth board's audit committee, about Vines' complaint.
E&Y's investigation of the matter beyond that communication, however, is not clear. U.S. District Judge Inge Johnson asked Lamphron: "Did you check any invoices against any checks?" Reportedly, Lamphron responded: "I don't know that we did that."
Still, Lamphron defended his audit team's actions in his testimony: "We reached a point where we were satisfied with the explanation the company provided to us," he said. "The situation that Mr. Vines described was in fact happening, but our procedures determined there was no problem with what they did and that's still our conclusion."
Judge Johnson is considering whether to maintain a temporary freeze on the assets of fired HealthSouth chief executive Richard Scrushy. Scrushy's lead attorney Thomas Sjoblom denies that Scrushy knew anything about the alleged scam. If professional accountants could not catch the problems, he argued in court, his client "could not know this level of detail."
As CFO.com reported yesterday, Barbara Patton, manager of HealthSouth's accounts payable department, also testified that she has doubts that Scrushy knew what was apparently going on in the HealthSouth finance department.
According to charges filed by the Department of Justice, HealthSouth fraudulently overstated earnings by $2.5 billion.
PCAOB Calls for Foreign, Domestic Accounting Firm Registration
Late Wednesday, the Public Company Accounting Oversight Board approved a new system to register accounting firms in and outside the U.S.
The registration rules for cross-border accountancies is not winning the board any new friends in Europe, however. Foreign accountants, which lobbied for an exemption to the registration, were instead provided with an additional six months to register.
Under the system, U.S. accounting firms must be registered online with the oversight body by Oct. 26 ,while non-U.S. firms have until April 2004.
Specifically, overseas firms will be required to register if they audit companies listed on American stock exchanges. Foreign firms will be exempt from supplying information if doing so conflicts with their own country's law, especially those intended to protect privacy.
The board's decision was not exactly cheered by officials at the European Union. Frits Bolkestein, the E.U.'s internal market commissioner, reportedly called for a moratorium on the registration of E.U. audit firms in its 15 member states until a transatlantic resolution can be reached. "Rigorous home-country control over audit firms is a far more effective way to protect investors," he was reported as saying an article on CBS MarketWatch.com.
Bolkestein also believes the rule could have a negative impact on U.S. auditors doing business abroad. "Registration of E.U. audit firms is unnecessary, burdensome and disproportionate," Bolkestein added. "The PCAOB's approach may lead to mounting pressure to require U.S. audit firms to register in the E.U."
The PCAOB's ruling would reportedly impact some 280 E.U. companies with a stock listing in the U.S., as well as multinational U.S. subsidiaries operating within the E.U. Under its requirements, auditors overseas would need to register in order to continue to prepare the financial statements of U.S. publicly listed companies.
The SEC still must approve the board's rule. No decisions have been made yet on whether to inspect accounting firms outside the U.S., subjecting them to its oversight.
Inspections of Big Four accounting firms are slated for the summer and fall, according to statements made by Charles Niemeier, the PCAOB's acting chairman. Board member Daniel Goelzer told Dow Jones Business News that U.S. regulators would like to develop cooperative inspection and disciplinary programs with counterparts outside the U.S.
In a separate action, the board approved a $70 million annual budget for 2003, which does not yet include fees for registering accounting firms, according to Dow Jones. Revenue for the nonprofit board will come chiefly from fees on public companies, which are projected to bring in $68 million this year.
The mid-six figure salaries for PCAOB's four board members have drawn criticism on Capitol Hill. But at this point, it's not likely that those salaries will be adjusted.
Last week, the Securities and Exchange Commission selected William J. McDonough to head the new agency. McDonough, currently the chairman of the New York Federal Reserve, is expected to take the reins from Niemeier next month.
The PCAOB -- which was established by the Sarbanes-Oxley Act -- is charged with setting audit firm standards and overseeing quality control, ethics, and independence issues. The board has the power to discipline accountants.
House Committee Gives SEC More Time
The House Energy and Commerce Committee gave the Securities and Exchange Commission until Wednesday to produce documents relating to the accounting failures at Enron, WorldCom, Tyco International and 10 other big companies. This, according to an Associated Press report.
Committee Chairman Rep. Billy Tauzin's spokesman Ken Johnson reportedly said the committee was giving the SEC additional, unspecified, time to meet the request in light of what he called SEC Chairman William Donaldson's "good-faith effort" to do so. Donaldson's predecessor Harvey Pitt had refused to provide such documents last summer.
As CFO.com noted yesterday, the House committee has also requested records from HealthSouth and its auditor, Ernst & Young, regarding HealthSouth's $2.5 billion earnings overstatement.
Company Sites Skimp on Corporate Governance Data, Survey Says
Most public company websites lack important details on their corporate governance practices -- despite increased regulations and investor scrutiny. Or at least, that's the takeaway from a new international study by investor relations consulting firm Blunn & Company Inc.
The study of 250 U.S., Canadian, British and European corporate websites during March finds that only 34 percent provide biographies for members of their board of directors. Even fewer (24 percent) publish their boards' corporate governance policies online, while only 10 percent offer information about trading in company shares by insiders.
The SEC will require all public companies with websites to post insider-trading reports on their sites before July 30, 2003. The commission has encouraged companies to do so ahead of time.
But so far, only 13 percent of U.S. large-cap and 8 percent of mid- and small-cap companies in the study have done so. In contrast, all German companies posted insider trading information prominently on their sites.
Indeed, many European companies -- and large-cap U.S. companies -- appear to be ahead of the voluntary disclosure curve. The study found 44 percent of U.S. large-cap companies and 75 percent of big European companies in the study have added corporate governance sections to their websites.
"For large-cap U.S. companies this is a big improvement from six months ago when an earlier study we did showed that only 10 percent of them had governance sections," said Blunn & Company's Dominic Jones, the study's author.
Smaller U.S. companies did not get such a glowing review. Eight percent of U.S. mid- and small-cap companies in the study have separate corporate governance sections on their sites; 6 percent posted codes of conduct and 8 percent publish corporate governance guidelines online.
Other country's companies lagged behind some of their U.S. counterparts. Only 13 percent of Canadian and 20 percent of British companies in the study provided codes of ethics on their sites; 17 percent of Canadian and 10 percent of British companies posted their corporate governance policies online.
Beyond regional and market cap differences, another significant finding is the extensive inconsistencies in the breadth of disclosure by public companies. Of those companies with governance sections, only 33 percent (or 9 percent of all companies in the study) included at least their corporate governance policies, key committee charters and a code of conduct applicable to senior officers.
Only 4 percent highlighted their complaint reporting procedures for people with concerns about accounting issues, while just 12 percent posted their articles of incorporation, 10 percent their bylaws.
The study included 100 U.S. large-cap, 45 U.S. mid-cap, 35 U.S. small-cap, 30 Canadian large-cap, 20 British large-cap and 20 European large-cap companies.