On the Money: Too many chief financial officers with MBAs, too few accountants

By Michael Coote

Friday 12th July 2002

The roll call of inglorious US company smashes over dud accounting continues.

The Economist reports that the pre-Enron scandal of Xerox still hogs headlines stateside.

A whistleblower, James Bingham, first dobbed the company in two years ago. The magazine reports that the company finally admitted on June 28 this year to overstating profits (a "misapplication of Gaap") between 1997 and 2001 by $US1.4 billion.

Former CFO Barry Romeril, who served during the 1990s, did not quit Xerox until December last year. Mr Romeril has apparently been written to by the Securities & Exchange Commission, which wants him to explain why he should not be charged with fraud.

The Economist itself has been obliged to undertake some degree of mea culpa. It confesses in an article entitled "Too creative by 50%" (July 6) that a sister publication, CFO magazine, awarded Scott Sullivan and Andrew Fastow excellence awards. Mr Fastow was CFO of Enron and Mr Sullivan held the same rank at WorldCom.

Both former executives are now besieged by legal troubles that might have an ending in imprisonment. They may yet cite their excellence awards as character references - a tad embarrassing for the Economist's media stable.

Mind you, as NBR pointed out last week, our country managed to laud similar people at Fortex.

The Economist belatedly exposes a key reason for some former top CFOs getting up to their eyeballs in corporate fraud. It seems few of them have accountancy degrees.

Instead they tend to have MBAs and finance degrees that favour creativity with numbers over bean-counting. Added to that is the commonplace occurrence of CFOs arriving at companies on the coat-tails of new CEO chums.

Stock options contribute to the temptation to corruption. It would be worth checking out our own stockmarket's CFOs to see if they match the Economist's statistics for the US Fortune 500 companies of 20% certified public accountants, 35% MBAs and only 5% with both qualifications.

The website Cnet.com (July 3) chips in with a cautionary tale of how dissenting analysts end up getting crushed by powerful companies and rival analysts with vested interests.

The case study company is Qwest Communications International. The American outfit became a big deal in telecoms by purchasing US West. Qwest's stock has fallen 92% since its high of nearly $US58 in July 2000.

Its stockmarket demise has not been halted by an SEC investigation into the company's accounting practices, nor by revelation that former CEO and ex-AT&T executive Joseph Nacchio was paid $US4.22 million in 2000 and $US27 million in 2001.

Mr Nacchio was a heavy hitter for Qwest. In June 2001, two Morgan Stanley analysts, Jeffrey Camp and Simon Flannery, had the temerity to question Qwest's accounting under Gaap the morning after Qwest published a glowing report of its quarter's performance.

Next day Qwest held another analysts' briefing to deal to Messrs Camp and Flannery. Mr Nacchio went in boots and all, being quoted as nearly shouting that the Morgan Stanley opinion was "innuendo" and "hogwash." He was backed up by his CFO Robin Szeliga and at least nine brokerage houses.

In October last year, other analysts attacked Qwest's accounting. Two firms, Merryl Lynch and JP Morgan, wondered out loud if Qwest was double-booking revenues in contra deals. More analyst briefings followed to calm troubled waters.

It is clear from the Qwest saga that an atmosphere of aggressiveness and intimidation by corporates along with complaisance by analysts in their pockets must have contributed to the possibility of accounting peculiarities and even outright fraud.

The complicitous analysts deserve as much stringent investigation as the erring firms they backed.

The scary and overpaid Mr Nacchio was sent packing from Qwest a couple of weeks back. It is not clear whether Mr Szeliga has been posted one of those dreaded SEC letters or what has happened to Messrs Camp and Flannery.

But stay tuned to the state of CFOs and keep a close eye on their objectivity and qualifications here in Godzone.

As for analysts, no doubt some of them at least can expect to be on the receiving end of an SEC direct mailing campaign. Not before time.

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