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Ron Lunde Reports
Copyright 2004, Ronald Lunde & The Lunde Co.
Reproduced with Permission

A Fish Story

Jamie Olis is 38 years old. He has an infant daughter. It is quite probable that he will not be around to see her grow up or go to her graduation. He might not attend her wedding.

Unlike Bernie Evers or Martha Stewart or Jeff Skilling or John Rigas he was not a big fish in the corporate world. You have probably never even heard his name. But like the above mentioned, he was involved in accounting issues. He was a mid level executive at Dynegy Inc., a Houston based supplier of natural gas. He never amassed a fortune. He never made over $162,000 per year in salary.

He and a small handful of others at his company devised Project Alpha, a scheme designed to disguise a $300 million loan as cash flow. Just a little accounting sleight of hand. He did, therefore, commit securities fraud ... unfortunately in 2001. Had he committed the act in 2000, the sentence would have been six to seven years. In the Sarbanes-Oxley era, newly implemented federal sentencing guidelines indicate that he will face 24 to 35 years. Sim Lake, a Federal Judge, will decide his fate tomorrow...Thursday.

Remember ... Sarbanes-Oxley is not just about big fish!

Adecco
Add Adecco to your memory. It is a name that you will be hearing a lot about if you have a job in sales or marketing ... because your CEO and CFO will be hearing a lot about it...and your outside auditors will be probing and probing and probing.

Why? You control a lot of money and probably have weak systems. Sec 404 of SOX is effective June 14th ... which means that on your next quarterly statement your CEO and CFO will have to attest to the fact that they have adequate accounting and control systems in place. Then your outside auditors will have to make a formal statement at year's end essentially as to the effectiveness and efficiency of your systems or point out the lack thereof.

So what about Adecco?

Adecco is a French company with global operations ... in the temporary employment business. Their US operation is Olsten which they acquired in 2000 for about $1.6 billion.

Seems Adecco cannot provide financial statements at this time...since their auditors won't sign off on the audit. (Adecco's CFO and President of its American subsidiary were promptly fired Friday and the CEO has been 'detached' from the investigations into the problem. This is an outcome your management would like to avoid.)

What went wrong? Mundane things like routine reconciliation of payroll bank accounts, applying payments to reduce accounts receivable, and a lack of documentation of the rates that clients agreed to pay. The company is unable to quickly discover and rectify billing errors. A lack of segregation of duties. (Shades of Ahold and vendors). The company also reported that 'whistleblowers' were involved and that might indicated that the problem is deeper than a lack of controls or that the lack of controls was used to create some other level of fraud. ( One of my readers assured me that the whistleblower statute only affected dealings with the federal government and should be of no concern to companies. That may be true, but I am not sure he has ever faced the wrath of a downsized employee base before.)

Whatever...

Rest assured ... the SEC and Justice Department are on the Adecco case and the PCAOB will be having a chat with the outside auditors to determine if individuals of ultimately the firm will retain their practice licenses.

What is going on at Adecco is exactly the situations and practices or lack of practices that Sarbanes-Oxley and SEC 404 are designed to prevent...or at least imposed significant criminal, civil and financial penalties on those who don't think compliance is a necessary thing.

Additionally ... there is a little list that the SEC is starting to compile. Auditors are beginning to comment in their opinions about deficiencies they find. They do not have to formally yet...but some are starting to think about law suits and are protecting themselves. What $ 10 billion company recently got 'written up' for not having adequate systems to record revenue, etc.?

Why Worry? Be happy to send you a copy of my current article in FORUM Magazine...just published. Just send an e-mail with your request.

Ahold Aches
Ahold has announced today that they are putting both Bi-Lo and Brunos on the block. No announced buyers ... but they are putting them up for sale. The sale is required to raise capital as a result of their accounting meltdown. Ahold is engaging in a fairly significant asset disposal worldwide. They do not have a lot of room for sales/operating error or disappointing results.

There are a significant number of distressed food retail assets on the market at the moment. The California strike is putting pressure on other properties. Then there is Walmart Mart. Then there are the evolving effects of the new accounting issues and rules, plus SOX.

Then there is the SEC. The SEC's Wells Notice to General Mills this last week has to have CPG management thinking and rethinking their promotional and marketing spending. Too many retailers depend upon CPG largess for too significant a portion of their profit structure ... and too many brand sales and marketing organizations only know 'checkbook' marketing and sales strategies.

Ahold, Safeway and Winn Dixie among others are in weakened positions now. As implausible as it might have seemed a year ago ... well ... icons and dynasties can ... unfortunately ... disappear.

Coke
The SEC upgraded the status of its investigation of Coke to 'formal' today.

This has to do with accounting and other issues ... first brought to light by a whistleblower. The Atlanta Office of the Justice Department is also conducting an investigation.

This is a marketing practices investigation.

Grant Thornton
Grant Thornton is already in deep trouble because of its audit of Parmalat. Today the SEC filed formal charges against the firm and another firm Doeren Mayhew for their audit of MCA...now bankrupt.

Stephen M. Cutler, Director of the Commission's Division of Enforcement said: "Today we sue not only the audit partners of Grant Thornton and Doeren Mayhew who contributed to MCA's accounting fraud, but the audit firms themselves. That is because the failures set forth in the administrative complaint are not just personal failures ? they are institutional failures. In Grant Thornton's case, the firm "rented" out its name and prestige to the audit work of a smaller firm without taking adequate care to ensure that the audit was properly staffed and performed. In Doeren Mayhew's case, the firm failed to ensure that the personnel assigned to the audit had the requisite expertise and acted with requisite care and skepticism in conducting the audit."

A hearing will be scheduled before an administrative law judge to determine whether the Division's allegations are true and to provide the respondents an opportunity to present defenses. Included in the relief the Division may seek are suspensions from practice before the Commission, restrictions on the respondents' professional practice, censures and disgorgement of ill-gotten gains. ( This is the same general thing they said about the actions that could be taken against Arthur Anderson prior to turning off the firm's 'light switches'.

Of interest ... there is now a data base, in test, that keeps track of all registrants. It is easy to cross reference any firm to its auditor and any auditor to its firms.

The obvious point is that once these two firms are on the SEC/Boards' (PCAOB) radar screens and database, other clients of the firm/office/partners will feel the brunt of increased scrutiny. Prudent investors may choose to limit their exposure to potential fallout if they have the ability to track and trace these relationships.

So...once again ... your outside audit firm will know that it is being carefully watched...that it must be very careful. Your own accounting team will know that they are being 'watched' by the auditors. You should remember that both of them will be watching your activities.

Are you ready for 404 enforcement?

PCAOB Apporoves Internal Controls 404

The Public Company Accounting Oversight Board approved the standards for auditing or attesting to internal controls as required by Sec 404 of Sarbanes Oxley today.

The document is some 200 pages long.

I will attempt to provided insight over the next few days.

The important thing is that compliance is now required by companies (accelerated filers or most large companies) with year ends on or after Sep 15th, 2004.

That means that a lot of work will have to be done between now and then. Consider that over 60% of firms have either not yet considered compliance with the Sarbanes-Oxley Act, or have only just started researching for it. (Based on a 500 company survey just released.)

Sec 404 compliance will have consequences beyond just checking accounting systems. Look for just about every expenditure to be tested and evaluated. I still think that sales and marketing expenditures will receive close scrutiny in the next months. Systems will be required to track expenditures.

Start getting prepared!

SEC Extends Sec 404 Compliance Requirement to Nov. 15, 2004

Washington, D.C., Feb. 24, 2004 - The Commission has extended the compliance dates for amendments to its rules under the Securities Exchange Act of 1934 that were adopted on June 5, 2003, pursuant to Section 404 of the Sarbanes-Oxley Act. The amendments require a company to include in annual reports a report by management on the company's internal control over financial reporting and the accompanying auditor's report.

Under the new compliance schedule, a company that is an "accelerated filer" as defined in Exchange Act Rule 12b-2 (generally, a U.S. company that has equity market capitalization over $75 million and has filed at least one annual report with the Commission), must begin to comply with these amendments for its first fiscal year ending on or after Nov. 15, 2004 (originally June 15, 2004). A non-accelerated filer must begin to comply with these requirements for its first fiscal year ending on or after July 15, 2005 (originally April 15, 2005). The Commission similarly has extended the compliance date for related requirements regarding evaluation of internal control over financial reporting and management certification requirements, including certification and related requirements applicable to registered investment companies. Please refer to Release No. 33-8392 for more detailed information.

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Updated as of 09/01/2006