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Law Makes Company Account for Past Sins

Tensions boiled.

"It was a disappointment that there was an error. There were no reasons for these," said the source. "The decision is an easy one: If it's a mistake, you fix it."

Two weeks after the first restatement, on Nov. 18, the company said it had misclassified $92.9 million in assets. The funds had been counted as accounts receivable, but they should have been counted as unbilled revenue. The same day, BearingPoint announced that its chief financial officer, Robert S. Falcone, would retire. He had a major role in complying with Sarbanes-Oxley.

Sarbanes-Oxley

Congress passed the act in the summer of 2002, after financial scandals at Enron Corp. and WorldCom Inc. drove the companies into Chapter 11 bankruptcy protection and cost investors billions of dollars. The law, among other things:

• Requires chief executives and chief financial officers to certify the accuracy of their companies' financial results.

• Limits the type of work independent auditors can perform for clients.

• Increases the criminal penalties for destroying or tampering with documents.

• Bars companies from awarding top executives preferential loan deals.

Plenty of Problems

In recent months, several Washington area companies have disclosed problems with their accounting controls.

BearingPoint Inc., MCLEAN

Told investors in December that it may not meet the deadline for filing its year-end financial statement because auditors had detected possible weaknesses in its financial controls.

CompuDyne Corp., Annapolis

Announced Feb. 23 that it would delay release of its financial results for 45 days to complete as much work as possible on reviews of its internal controls.

Fannie Mae, Washington

Outside auditors last year cited "strong indicators of material weaknesses" in internal controls at the mortgage giant, which may be forced to restate earnings by as much as $9 billion because regulators said it had misapplied accounting policies.

Freddie Mac, McLean

New auditors at the mortgage company found billions of dollars in accounting errors and control problems last year that the company is correcting and restating.

Mills Corp., Arlington

Disclosed Feb. 16 that it would restate earnings back to 2002 because of accounting problems that a company executive called "a byproduct of the Sarbanes-Oxley environment."

TalkAmerica Holdings Inc., Reston

Issued news release Feb. 16 saying it would delay announcing its fourth-quarter earnings and may have to restate its profit because outside auditors may have uncovered "material weaknesses" in the company's accounting controls.

Then, inconsistencies in how BearingPoint's international units bill and account for revenue surfaced -- issues that forced BearingPoint to warn investors Dec. 16 that the company might not meet its Sarbanes-Oxley obligations by the time it files its 2004 financial statement next month.

Word of BearingPoint's problems came out in a document it filed with the Securities and Exchange Commission, reporting that the company was restructuring its debt to reduce the risk that the company would be found in default of its loan agreements. The accountants testing internal controls had discovered that some BearingPoint subcontractors were not immediately recording revenue, as they should have been. The delay probably would not have affected BearingPoint's overall financial results, McGeary said, but it was enough to raise red flags and merit inclusion as a possible "material weakness" in the SEC filing.

The night before the filing was issued, McGeary said, he read the passage on Sarbanes-Oxley again and again, tinkering with the language to make sure it was just right.

"I wanted it to convey that this is a difficult task. That we view it as a huge challenge, and we're having some issues with it," he said.

BearingPoint told investors in the December filing that it would probably find another material weakness and might not be able to complete its Sarbanes-Oxley review by March 16, when the company is supposed to file its earnings statement for the past year.

The company's stock price fell almost 9 percent the day it filed its disclosure, and the most difficult part may still be to come as its auditors, PricewaterhouseCoopers LLP, test controls throughout the company in the coming weeks.

BearingPoint is in the business of helping clients manage big projects, technology initiatives and other moving parts -- all issues the company is grappling with in its own executive suite. For their part, both McGeary and Wilde said the internal control disclosures have not had a broad impact on BearingPoint's business.


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