Stalling disclosures backfires on firms

Aug 19, 2002  •  Post A Comment

Media and entertainment companies have only scratched the surface of full disclosure and accounting issues and will likely suffer more scandal and shame before adopting any meaningful reforms.
There is plenty of stunning evidence to support this harsh indictment.
For starters, the government-mandated certification signed last week by chief executives of most of the largest public firms-which included a reluctant AOL Time Warner at the eleventh hour-applies to the financial information companies choose to disclose in Securities and Exchange Commission filings. The “good faith” pacts, backed by stiff fines and prison terms, have little to do with the formidable, often telling financial data companies choose not to disclose.
That is precisely the kind of information that has created a problem for AOL Time Warner and other media companies.
AOL TW waited until the Aug. 14 certification deadline to disclose (but not detail) an additional $49 million in America Online revenues it only recently discovered “may have been inappropriately accounted for as advertising and commerce revenues.” The company said there could be more such disclosures, perhaps as a result of ongoing probes by the SEC and Department of Justice of $270 million in previously uncovered questionable accounting at AOL. While the values are minuscule, these piecemeal disclosures of them destroy credibility.
Parsons keeping quiet
Given the complexity of AOL Time Warner’s operations, the amount of detail it has declined to disclose and the untested ground represented by Internet finances, it is understandable that the company’s new CEO Richard Parsons was reticent about signing off on numbers and accounting practices he inherited from a division he did not oversee.
AOL Time Warner’s effort to be more forthcoming about America Online revenues in a recent earnings call prompted a new round of queries from Wall Street about legitimate third-party ad sales vs. intercompany deals.
But AOL Time Warner is hardly alone.
Officials of bankrupt Adelphia Communications declined to sign the SEC certification because the company is in the process of restating its financial statements from 1999 to 2002 to reflect allegedly illegal loans and investments and questionable accounting that already have resulted in the indictment of its former top executives, shareholder lawsuits and government investigations. Such related party transactions-which have become scarce in media company filings-could be footnotes or addenda to a company’s consolidated earnings statement.
But even in this time of intense scrutiny companies are allowing sensitive disclosures to trickle out between SEC filings and analyst calls and to be lumped with varying indiscretions all tainted by the same brush.
The Walt Disney Co. waited until after the stock market closed on a Friday in August to disclose that it had employed the family members of two supposed independent board members, Stanley Gold and Roy Disney, who have become vocal opponents of 18-year Chairman Michael Eisner and the company’s recent decline. Had this disclosure been dealt with routinely, it might not have been an issue, although Disney and other companies are short on information about board members. Instead, it has become a weapon in the systematic dismantling of the Eisner regime.
The timing of bombshell disclosures also has been an issue for others, making it appear as if companies are giving the entire disclosure process the back of their hand.
Gemstar-TV Guide International waited until late Wednesday to disclose that it is restating its 2002 earnings due to at least $20 million in misappropriated revenues that even KPMG, its accountants, won’t sign off on despite an ongoing internal investigation. It matter-of-factly tagged on a reference to its top management’s being under siege by 42 percent owner Rupert Murdoch and his News Corp. It was the first acknowledgement Gemstar made on either matter without elaboration.
Cablevision Systems also managed to raise far more questions than it answered with its recent second-quarter earnings report and in-person investors conference, during which management promised to be more forthcoming and then declined to fully answer analysts’ questions about capitalization and its discretionary investments in direct broadcast satellite and personal communication service. After its stock took a beating and after several major analyst downgrades, Cablevision on Aug. 15 issued a slightly more comprehensive quarterly report with the SEC that shed more convincing data about how it can close a $1 billion-plus funding gap.
In stark contrast, News Corp. and its Fox subsidiary Aug. 14 offered a detailed fiscal fourth-quarter and fiscal 2002 report. In a conference call with analysts, Chairman Rupert Murdoch and President Peter Chernin were even candid about the company’s $6 billion in Gemstar losses-a record by Australian standards. The result: News Corp. and Fox stock prices rose on a slew of analyst upgrades and favorable reports.
A financial data crisis
These examples, which represent only the tip of the iceberg, demonstrate several important points. There is a crisis in the quality of financial data provided by companies, rather than the mere quantity. The selection and manipulation of data by companies, both well intended and not, will continue to shape financial disclosure out of sheer necessity. There simply is too much data to present it all, especially in an age of consolidated behemoths. Even under intense scrutiny from regulators and investors, companies continue to present information in ways that best serve their needs and interests.
Perhaps the most immediate problem is the wiggle room in existing accounting and financial reporting standards for companies to avoid detailing some significant expenses.
For instance, Disney, Viacom and General Electric Co.’s NBC routinely resist separately reporting the revenues, cash flow and other financial particulars of their broadcast and cable networks and their TV station groups, which are having a dramatic impact on their overall bottom line. They usually are combined in one category such as “media networks.” Only News Corp.’s Fox subsidiary has recently provided a clearer performance picture for those units.
Another good example is stock options, which became an important factor in executive compensation in a long-running bull market and have managed to elude most balance sheets. New pressure for companies to expense stock options and even pension-related costs will have a huge bottom-line impact. Buried in the footnotes of AOL Time Warner’s 2001 consolidated statements is dazzling information about what was then valued by the company as some $5 billion in stock options dolled out to executives as part of a founders agreement in the first post-merger year. If they had been expensed, it would have shaved more than $1 billion off AOL Time Warner’s 2001 earnings. Disney and GE recently have said they will begin expensing stock options.
It appears the best and only long-term hope is sweeping, thoughtful reform that over time will ensure more consistent and clear accountability. Some of those new measures should be:
* A universal standard for reporting the revenues, earnings before interest, taxes, depreciation and amortization and other basic financial details for any business unit that generates 5 percent or better of either a company’s overall revenues or earnings. This would require conglomerates to provide more insight into their smaller but important operating units.
* A breakout of revenues, cash flow, capital expenditures and investments relating to a company’s specific divisions, regardless of their overall contribution to the corporation’s bottom line. In the case of media companies, this could ensure more detail about programming license fees, production costs, programming, syndication backlog, news coverage costs and cross-platform advertising deals.
* A clear disclosure and discussion of related party transactions, including deals or arrangements with company executives, board members and thei
r relations.
* A clear sense of how companies calculate their write-downs and losses. They should break down the specific businesses, expenditures and other factors contributing to these losses and state the long-term implications.
* A clear description of the charges and corresponding services provided to a company by various support professionals-from lawyers to accountants.
* Expensing stock options, pension-related transactions and executive perks, which can include lavish in-home screening rooms.
* More detailed information about the background, connections, qualifications, outside interests and investments of all board members.
* Require buy-side and sell-side analysts to routinely file their comments and concerns with the Financial Accounting Standards Advisory Council, the Financial Accounting Standards Board and other groups soliciting input as standards are revised as required by the continuing restructuring of corporate America. Who better to ask than the folks who routinely pour through and analyze these voluminous financial filings?