2005, the Year of the Restatement and the Year KPMG Survived
With a background of former executives seen entering courthouses, called to account for corporate scandals of previous years, and indictments announced against individuals and KPMG partners, corporate accounting issues surfaced in a less dramatic way in 2005, through restatements of financials, at giants like American International Group (AIG) and mortgage companies, Fannie Mae and Freddie Mac. In fact, 2005 could become the Year of the Restatement, as numerous US companies restated their results for previous years, to be in compliance with the Sarbanes Oxley (SOX) Act of 2002, or as a result of audits by the Public Company Auditing Oversight Board (PCAOB).
When AIG, the giant insurance company, finally announced its annual report in June, restating five years of results and lowering the company's net worth by $2.26 billion, as a result of a series of small accounting errors, the question of materiality, who defines it, and when does new information affect materiality, became a focal point of the story, according to a Wall Street Journal report. AIG announced additional restatements in August, related to a surplus held by its general insurance company subsidiaries, and a third restatement in November, related to how it accounted for derivatives, balance sheet reconciliation and income tax accounting, the New York Times reported. Maurice Greenberg, the former CEO, avoided prosecution on criminal charges for fraud, but may still face civil charges.
Fannie Mae, which admitted understating its losses for the years 2001 through 2004 by violating accounting principles relating to recording derivatives, while issues with the hedging strategy against interest rate fluctuations, postponed restating its results until 2006. In September, the mortgage company announced that its financial reporting for 2005 might not be “effective.” Congress passed a bill in November strengthening oversight of Fannie Mae and Freddie Mac, but the bill faces opposition from the White House and the Senate. The White House, concurring with remarks made earlier this year by Alan Greenspan, chairman of the Federal Reserve, issued a statement, reported in the Washington Post, which said “Given the size and importance of the [companies] Congress must ensure that their large mortgage portfolios do not place the U.S. financial system at risk. [The bill] fails to provide critical policy guidance in this area.”
In a stunning collapse in October, just weeks after issuing an initial public offering (IPO), Refco, Inc., the giant futures broker, sought bankruptcy protection due to accounting improprieties. Phillip Bennett, former chief executive officer, has been charged with securities fraud relating to accounting for a bad debt of $430 million.
Refco’s collapse was unusual in 2005, as government regulators tried to prosecute individuals and rehabilitate companies, the New York Times reports. “You don’t want to be swinging a meat ax when a scalpel is appropriate,” explained Eliot Spitzer, New York’s Attorney General. “You want to get rid of the individuals who did the wrongdoing and get the company back on an even keel.”
Announcing the settlement agreement with KPMG at a press conference in August, Attorney General Alberto Gonzales said, “We . . . recognize the importance of avoiding collateral consequences wherever possible." KPMG’s settlement with the Department of Justice avoids a criminal indictment for the sale of abusive tax shelters and the fate of Arthur Anderson. KPMG will pay a fine of $456 million over the next 18 months, a cost of $276,000 per partner. Former KPMG partners face individual indictments.
The Justice Department dismissed its criminal indictment of Arthur Andersen in November, Reuters reported. Andersen’s 2002 criminal conviction in a Houston court was overturned by the Supreme Court, in June.