January 23, 2002

Not-So-Fine Moments

In Accounting History

By AARON ELSTEIN

Staff Reporter of THE WALL STREET JOURNAL ONLINE

Enron is grabbing all the headlines, and the casual observer might be shocked, shocked at what has transpired. Certainly the shredding of documents and the entangled political element creates a rich tale. But the sad truth is that creative accounting is not a new thing on Wall Street.

Over the past few years, high-profile accounting problems have hit one company after another. In the glare of a roaring stock market, however, several of these problems received only muted attention. Now, with Enron in the spotlight, the long look back at accounting mishaps looks more disconcerting.

Here are a few highlights from the past few years.

MicroStrategy. In March 2000, the software company says it will restate financial results for the fiscal years 1998 and 1999. Its stock, which reached a high of $333 per share, drops more than 60% from $260 to close at $86. In April 2000, the company adds 1997 to its restatement list, the stock drops to $33. After an investigation, the SEC says the company "materially overstated its revenues and earnings and was never profitable over the periods in question. The company's CEO, CFO, COO agreed to more than $10 million in penalties, without admitting wrongdoing. MicroStrategy now trades at $3.15.

Waste Management. The company and its accountant, Arthur Andersen LLP, paid $220 million in 1999 to settle suits filed by investors who bought Waste Management stock between 1994 and 1998. In June, 2001, Andersen agreed to pay a $7 million fine to the SEC to settle fraud allegations in connection with the accounting firm's audits of Waste Management's financial results. Neither Waste Management nor the auditor admitted any wrongdoing. Neither Waste Management nor any of its employees have been disciplined by the SEC, whose investigation is continuing. Waste Management trades at $29.80.

Sunbeam. In the words of the SEC, a "massive financial fraud." The maker of household items suddenly reported massive increases in sales for its various backyard and kitchen items, but the sudden surge in demand for barbecues didn't hold up under scrutiny. The SEC said $60 million of Sunbeams' $189 million in 199 earnings came from accounting fraud. The SEC suit also named a partner at Sunbeam's accounting firm, Arthur Andersen. Sunbeam filed for bankruptcy reorganization in February 2001. Problem: Revenue recognition. Sunbeam no longer trades.

Lernout & Hauspie Speech Products. The Belgian voice recognition software company filed for Chapter 11 bankruptcy reorganization in November 2000 after an accounting scandal that resulted in management turnover, government investigations in the U.S. and Belgium, and extensive layoffs. An audit of the company's books revealed that L&H fabricated $373 million in revenue, or 45% of sales from early 1998 to mid-2000. Most of the sales came from phantom operations in Asia. Lernout no longer trades.

Cendant. In April 1998, the franchising company, formed in Dec. 1997 after CUC International and HFS Inc. merged, said it would reduce reported 1997 earnings by more than $100 million and expected 1998 earnings will be reduced by about the same amount. Among the problems: Improper accrual of reserves related to membership cancellations. Cendant trades at 19.44.

Write to Aaron Elstein at aaron.elstein@wsj.com

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