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Cisco, AOL may revise accounting

When US companies release second-quarter results this month, their accounting practices may get more attention than the numbers they produce.

Investors and analysts are bracing for more revisions to financial reports in the wake of last week's multibillion-dollar restatements at WorldCom Inc and Xerox Corp and earlier ones at companies such as Enron Corp and Kmart Corp.

"There will be a continuing stream of these blow-ups," said Howard Schilit, president of the Center for Financial Research and Analysis Inc, an independent research firm in Rockville, Maryland. They represent the flip side of the 1990s bull market for stocks, "where the most egregious behavior was rewarded," he said.

Schilit, who doesn't invest in stocks, said the most likely candidates for accounting revisions are companies such as Cisco Systems Inc that grew with the help of acquisitions. AOL Time Warner Inc, once faulted for accounting similar to WorldCom's, and 3M Co, which has taken charges for seven quarters in a row, also deserve scrutiny, he said.

International Business Machines Corp tops the list of Bill Fleckenstein, president of Fleckenstein Capital Inc, who has bet against the company by selling borrowed shares. Other candidates, he said, might include Mirant Corp., Omnicom Group Inc., Oracle Corp. and Qwest Communications International Inc.

US companies are filing financial restatements to correct false or faulty accounting at a record pace this year, according to a study by New York University's Stern School of Business. The current record is 158, set last year. Restatements almost tripled from 1997 to 2001.

This is more than a bookkeeping issue. Investors have lost US$150 billion in the past year alone on WorldCom, which inflated profits by improperly accounting for some expenses; Enron, which hid debt through the use of partnerships; and Tyco International Ltd, whose accounting for acquisitions is the target of an investigation by the Securities and Exchange Commission.

Tyco, WorldCom and Xerox all contributed to the Standard & Poor's 500 Index's first-half decline of 14 percent, the steepest since 1970. The Dow Jones Industrial Average dropped 7.8 percent, partly because of IBM's 40 percent loss in the period. The Nasdaq Composite Index, including WorldCom and Oracle, sank 25 percent.

For the second quarter, charges for items such as accounting errors may top US$5 billion, said Robert Willens, managing director of Lehman Brothers Holdings Inc.

Before last week, Rite Aid Corp held the record for the largest restatement at a US company. The country's third-largest drugstore chain, in July 2000, erased US$1 billion of profit for the previous two fiscal years. Then WorldCom disclosed that about US$3.9 billion of expenses belonging on its income statement were instead booked as capital expenditures. The accounting maneuver, found during an internal audit, enabled the second-largest US long-distance telephone company to conceal losses for more than a year.

The disclosure may force the Clinton, Mississippi-based company to file for bankruptcy, investors said. Such a filing would surpass Enron's, made last December, as the largest in US history because of WorldCom's US$92 billion of assets as of March.

"This is yet one more shoe in a closet full that the US financial community seems to have," said Robert Christian, the chief investment officer at Wilmington Trust Co, which manages US$27 billion.

"We got into this pickle because there was a certain amoral climate that existed in the late 1990s, when the market was going great guns," said Charles Elson, director of the University of Delaware's Corporate Governance Center. Many investors are wondering which company will be next. Some have singled out Cisco, the world's largest producer of computer-networking equipment, as Schilit did.

"Cisco has gotten a lot of scrutiny because they had a market [value] that grew very rapidly and people said it was too good to be true," said Walter Casey, an analyst at Banc One Investment Advisors.
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