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Excavations in Accounting
Rep. Michael G. Oxley (R-Ohio), left, and Sen. Paul S. Sarbanes (D-Md.) co-sponsored the legislation meant to improve corporate accounting.
(By Jay Mallin -- Bloomberg News)
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Provident Bankshares Corp. of Baltimore in November found it had used improper hedge accounting on interest-rate swaps, which are derivatives used to guard against interest rate swings. In essence, an accounting method used and signed off on by auditors for years was retroactively judged to be worthless. The result: Provident shaved $947,000 off the earnings it reported in the 21 months ended Sept. 30.
In addition to these companies, Maryland real estate company American Community Properties Trust and McLean consulting firm BearingPoint Inc. have struggled with restatements in recent months. BearingPoint has more than 400 temporary accountants redoing its numbers for 2004 and 2005.
"The general consensus is [the restatements are] an indication of how well Sarbanes-Oxley is actually working," said Kurt Schacht, managing director of the Centre for Financial Market Integrity at the CFA Institute. "What you're seeing in essence is deferred maintenance, the fixing of internal controls that have been neglected, and in the first years after Sarbanes-Oxley, they will be weeded out. Over time, restatements will come down."
Mills, in the evolution of its accounting troubles over the past year, provides one of the most striking examples of the Sarbanes-Oxley environment. Mills in recent years expanded aggressively, buying malls and planning huge new developments, including the $1.3 billion Xanadu, a massive mall and entertainment center in the Meadowlands, N.J.
These massive bets, involving billions of dollars, heightened the risk for Mills if its internal controls couldn't keep up with the company's growth.
"As companies evolve through merger or growth, the needs of the business from an information-processing standpoint, those needs change," Ramos said. "And managers sometimes forget about that. For management of a growth company, accounting is not a glamorous thing; it's not sexy. Making the sale is sexy."
Seigel, Mills' chief executive, seemed to indicate that Mills had outgrown its internal controls.
"We have grown over the last few years from an entrepreneurial development company focused on essentially one product . . . to a diverse and complex business that operates and develops a range of retail venues on the international stage," he said in November. "Mills has clearly reached a stage where top management needs to increase its focus on forecasting and planning and enhancing our performance management, accounting, control, and reporting functions. This is underway. We need to ensure that our infrastructure can meet the demands of a business ripe with opportunity."
