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Since the Enron fiasco blew wide open, the influential Moody's Investors Service has requested additional information from some 4,000 companies that use accounting methods that Moody's believes make it harder to judge their creditworthiness. Companies are also deciding on their own that confusing books just aren't worth it. Last Wednesday, Bank of America went to great lengths to explain a $418 million gain in the fourth quarter from a subsidiary set up last year to deal with problem loans. The gain resulted from tax savings after bad loans were shifted to the subsidiary. Not wanting an Enron-like taint, the bank clearly spelled out to analysts the legal maneuver, and investors rewarded the extra disclosure by pushing the stock up 4% in a week.
K Mart, which filed for Chapter 11 bankruptcy protection last week, announced on Friday that it was looking into internal accounting issues. The company offered no details. But the accounting getting closest scrutiny in the wake of Enron generally falls into three categories:
REVENUE RECOGNITION The SEC says its No. 1 line of inquiry is into the ways that companies book their sales. The most glaring example of revenue fraud occurred at Sunbeam five years ago. (The company's infamous former CEO, "Chainsaw" Al Dunlap, just last month settled a shareholder suit stemming from his stint at the small-appliance maker.) Sunbeam recorded the sale of gas grills and other goods well before they left the warehouse. Many of the items never did get shipped. By offering retailers deep discounts to place orders months before they normally would and by booking those sales immediately, Dunlap was able to show escalating revenue and earnings. Eventually, though, the scheme collapsed as retailers couldn't sell enough appliances even at discount prices and had to cancel orders.
The SEC warned Xerox three weeks ago about booking sales of copiers that, technically, are leased, not sold. Revenue from a lease is generally reported over the life of the lease, not up front. Xerox has said it will contest the SEC on this issue.
Some telecom companies are getting a second look, partly because more than a few use Arthur Andersen, Enron's auditor, but also because many achieved their once spectacular growth partly by immediately recognizing revenue from long-term contracts, analysts say. Qwest has received the most attention because its merger with US West opened the door to other accounting issues. Qwest has denied that it did anything wrong. "Think about a bottle of wine," former SEC chairman Arthur Levitt said in a speech two years ago. "You wouldn't pop the cork on that wine before it was ready. But some companies are doing this with their revenue, recognizing it before a sale is complete, before the product is delivered to a customer or at a time when the customer still has options to terminate, void or delay the sale."