Is it an `accounting scandal' or just another Elvis sighting?

July 24, 2002|By JAY HANCOCK

BRISTOL MYERS Squibb has been hit with a "nasty accounting scandal," the intellectuals at Fox News told us a couple weeks ago, in sentiments echoed across TV land.

Of course, Bristol's problems aren't nasty, probably aren't about accounting and aren't even very scandalous, but never mind. Fox's Terry Keenan looked blond and perky, so I assume the producers were thrilled.

The Bristol Myers coverage is a case of what Wall Street economist Joseph Battipaglia calls "Elvis sightings." Elvis sightings occur when people who don't think hard enough see patterns that are vaguely similar and assume they represent the same thing.

Enron and WorldCom had accounting problems. The government is investigating Enron and WorldCom. The government is also investigating Bristol Myers. So Bristol Myers must have accounting problems.

And the man serving mocha lattes at Starbucks had a 1956 hit called "Don't Be Cruel."

But even dedicated fans of corporate accounting fraud are having trouble keeping up these days. The Securities and Exchange Commission has opened more than 125 investigations of financial reporting this year, and that doesn't count the insider-trading and tax-evasion cases.

Because the stock market seems to assume incorrectly that every corporate wrong is the Teapot Dome scandal, a closer look at recent business hankypanky might help investors and policy-makers make better decisions.

To that end, here is a thumbnail Baedeker to the business badlands:

The first job is to separate the book-cooking from the tax dodges and unsavory stock sales.

In the latter category, ImClone founder Samuel D. Waksal has been charged with insider trading in connection with the dumping of ImClone shares just before a regulatory setback. Waksal friend Martha Stewart is being investigated in the same matter.

No evidence of accounting problems has surfaced at ImClone, where the allegations echo recent insinuations about President Bush - that he sold Harken Energy shares in 1990 with suspicious foresight, right before they tumbled. The SEC looked into the matter at the time and took no action.

Tyco International's former boss, L. Dennis Kozlowski, is accused of evading state sales taxes on a Renoir, a Monet and four other paintings he bought for $13 million. Again, this is unrelated to Tyco's business, although few will be surprised if Tyco ends up having to restate its accounts.

Most of the odor around corporate America these days does involve bookkeeping irregularities, but within that category there are wide variations in technique and severity.

Questions about how pharmaceutical concern Merck records sales, for example, represent another Elvis sighting.

Merck's Medco drug-insurance unit counts pill-buyers' co-payments at the pharmacy counter as part of revenue but then deducts them as an expense, yielding no net change on the bottom line.

This "gross revenue" accounting is not uncommon in health care, and it even makes Merck's profit margins look smaller, not bigger.

Nevertheless, Merck's stock has fallen 15 percent on the presumption that the company was puffing up results.

What has emerged about the Bristol Myers case isn't even about accounting.

The company essentially threw a huge holiday sale on pills and potions last year, allowing wholesalers to stock up at low prices and causing wholesale purchases to plunge this year.

Stupid management?

You bet, but if that were a crime, all the lawyers in America wouldn't be enough to staff the SEC.

If you do boil the books, there are two ways to get make-believe profits: fabricate revenue or hide expenses.

In the first category, the SEC is investigating telecom companies Global Crossing and Qwest. They may have enhanced results by trading network capacity and counting the swaps as sales.

In the hide-the-costs event, we have WorldCom, Adelphia and Halliburton. WorldCom has admitted moving what should have been nearly $4 billion in line-access costs and other fees to the asset section of its balance sheet, a stunning finagle.

Adelphia, in addition to guaranteeing questionable loans for the family of its chairman, recently reduced its reported cash flow for 2000 and 2001 by almost 15 percent, saying it hadn't properly accounted for purchases of set-top cable boxes and other items.

Halliburton is being examined by the SEC for possibly not writing down losing investments soon enough.

Which brings us to Enron, whose prolific and manifold irregularities make it impossible to categorize, except perhaps as winner of the book-cookery decathlon.

Executives at the Houston concern inflated revenue and assets, hid costs and liabilities, dumped stock before problems emerged and engaged in outrageous self-dealing.

No bogus sighting here. Elvis is in Enron's building, singing "Heartbreak Hotel."

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