New Wave of Accounting Probes Deepens Fear

NEW YORK —  A new wave of disclosures about accounting investigations this week is deepening concerns about the extent of corporate misreporting of results in recent years.

Wall Street, still reeling from the Enron Corp. debacle, is facing an ever-lengthening list of companies whose financial reporting may have been less than straightforward since the late-1990s.

This week, platinum miner Stillwater Mining Co. said the Securities and Exchange Commission had raised issues about how the company accounts for its metal reserves.

On Monday, telecom giant Qwest Communications International Inc. said it may face SEC action over its accounting methods.

The SEC also has opened a probe into accounting at cable TV firm Adelphia Communications Corp. after the firm last week disclosed that it was on the hook for $2.3 billion in debt not included on its balance sheet.

Although the SEC has previously said it was launching new accounting investigations at an unprecedented pace, this week’s disclosures appear to have taken many investors by surprise, based on the tumbling prices of the stocks involved and the new downtrend in the market overall.

“Accounting issues arise more frequently when the stock market is down, but in my 45 years of experience, this is the biggest wave I’ve seen,” said Edmund L. Jenkins, chairman of the Financial Accounting Standards Board, which writes bookkeeping rules.

The investigations ultimately will be healthy for markets because they will spur greater openness, or “transparency,” Jenkins said. But at least in the short term they also may produce more volatility in corporate earnings and in stock prices, analysts warn.

The SEC says the number of accounting-fraud cases on its plate has been growing for years, but the Enron debacle--and the stock market’s plunge over the last two years--have made regulators and investors more sensitive and anxious about the accuracy of corporate reporting.

The heightened awareness has led to a greater number of allegations of wrongdoing, which helps account for the agency’s growing caseload, an SEC spokesman said.

In the first two months of this year, the agency said it launched 49 investigations dealing with financial reporting, compared with 18 in the same period of 2001. The SEC hasn’t tabulated March data.

In the mid- to late-90s the SEC’s enforcement division was focused primarily on such issues as insider trading, the Salomon Bros. Treasury-bond scandal and the landmark Nasdaq market price-collusion case.

By 1999, well before the Enron case broke, the SEC already had declared accounting fraud to be its top enforcement priority, dubbing it “The Year of the Accountant.”

The agency said at the time that it was particularly focused on so-called managed earnings, investigating whether companies were massaging their books to make sure they met Wall Street’s quarterly profit estimates.

The SEC says it has maintained its focus on accounting ever since. “It may look like this focus is something new, but that’s a public perception not supported by the facts,” an SEC spokesman said.

Even so, strapped for staff while under heavy pressure from Congress to root out fraud, the SEC appears to be trying to send strong messages to Corporate America in some recent cases.

On Monday, Xerox Corp. agreed to settle an SEC probe into its reporting of results since 1997 by offering to pay a record $10-million fine, the largest ever levied against a public company in a financial-reporting case.

The case centered on Xerox’s alleged practice of booking lease revenues upfront rather than over time. The SEC has said that such “revenue recognition” issues are the No.1 financial-reporting problem facing its investigators.

Last week, the agency charged former Waste Management Inc. executives with inflating the garbage company’s profit by $1.7 billion in the mid-1990s. The SEC called the case “one of the most egregious financial frauds we have seen.”

The weight of all of these cases is raising new doubts among investors about the truthfulness of the glowing corporate profit reports of the late-90s that underpinned the record-breaking bull market on Wall Street.

Although the upshot of the SEC’s push for cleaner accounting should be to ultimately strengthen investors’ faith in the U.S. financial system, for now the reports are adding to the crisis of confidence on Wall Street, analysts say.

Even firms that vigorously defend their accounting are getting punished in the stock market when questions arise.

Interactive TV-software firm Gemstar-TV Guide International, which this week disclosed that it had recorded nearly $80 million in revenue last year that was not actually collected, insisted it followed accepted accounting rules. Yet investors hammered the stock, fearing the company’s growth rate in recent years has been overstated.

Shares of energy trader Dynegy Inc. fell $1.30 to $28.79 Wednesday even as the firm defended its accounting treatment of a complex gas-supply transaction, the subject of a Wall Street Journal article.

Dynegy said the transaction--blessed by both its former accounting firm, Andersen, and its current one, PricewaterhouseCoopers--was a legitimate way of locking in a long-term supply of gas, reducing its taxes and cutting a growing gap between cash flow and net income.

“They’re searching the closets and bringing it all out now,” Richard Cripps, chief equity strategist at Legg Mason in Baltimore, said about companies and regulators.

Wall Street analysts, blamed for ignoring questionable accounting that took hold during the market boom, also are showing a new aggressiveness, quizzing corporate managers closely about off-balance-sheet financing, revenue recognition and other accounting issues, Cripps said.

As often happens on Wall Street, in Congress and in the media, people are showing a tendency to “fight the last war,” Cripps said.

“They’re asking all the questions they should have asked a year ago,” he said.

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Times staff writer Walter Hamilton in Los Angeles contributed to this report.

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