At MarketWatch I am fortunate that I am not expected to write a story every day, although that’s fine if something comes up like an SEC enforcement order or a spectacular corporate scandal. I am encouraged, instead, to come up with original analysis of important stories in financial regulation and legislation. We want to add something to the discussion based on my experience, on a timely basis, even if it takes a few days.
Last week I had three stories published that were suddenly baked, like three cakes, at the same time. I was working on on one of them for a couple of weeks and it finally came together, including getting two editors to sign off. Another was a tip from my boss that was based, at first, on just a press release that our New York team covered quickly in what we call a “pulse”, just a one paragraph summary of the release. I saw a different take. The last was also a breaking news story that seemed to require some additional color
It’s now almost routine that if the New York markets team sees a breaking story that has an accounting angle they will call me to either help them write a better first cut or hand it off after the initial quick take for me to write more or dig a bit deeper.
I like that.
The Valeant Pharmaceutical story is the gift that keeps on giving to journalists. Before I wrote what I did this week on the company’s acquisition accounting, I had already written quite a bit.
Many other journalists, including my astute colleague at the WSJ, Michael Rapoport, had been trying to dig into the company’s acquisition accounting to see whether all those deals were somehow being used in the service of aggressive revenue or profit recognition.
Michael wrote earlier on the subject, with a slightly different emphasis.
Valeant’s accounting stands out for its heavy use of tailored earnings metrics that strip out a wide range of expenses; favorable accounting for its acquisition and research-and-development costs; and a less-granular view of its business lines than rivals provide, analysts and investors say.
On Feb 4, WSJ Heard on the Street reporter Charley Grant wrote about Valeant’s quest for growth balanced between increasing volume and increasing prices.
My hunch was that Valeant was using its acquisitions to somehow enhance revenue or profit based on the accounting for the acquisitions. Goodwill is one of the the best places to do that, especially since they had accumulated a multi-billion dollar pile of it. Testing that hunch required compiling data from all the acquisitions since 2010 when Biovail first acquired Valeant itself. My editor insisted on a comprehensive view, rather than just a cut at the top three recent acquisitions.
For that job, I called Calcbench, a data gathering and analysis software company that uses the XBRL filings of pubic companies to build a better dataset.
It wasn’t easy and it took longer than I thought because Valeant makes a ton of acquisitions and isn’t consistent or neat about how it tracks the accounting for them over time. The results proved my hunch correct.
New, original research by MarketWatch, supported by data gathered by financial research firm Calcbench, shows how Valeant VRX, +5.93% uses a rare accounting maneuver to obscure the true details of its many complex deals. In particular, it shows how much it pays for companies over book value and how it adjusts that amount over time without hitting prior income statements….
The Valeant acquisition machine often pays a substantial premium for companies. That purchase premium is booked to its goodwill account, but Valeant has not been retroactively adjusting net income and expense when it subsequently revises the balances it calculated at the time of acquisition.
Accounting rules, called GAAP or generally accepted accounting principles, require companies to adjust the amounts recognized at the acquisition date when new information is obtained about facts and circumstances that existed as of the acquisition date. That adjustment is made to goodwill, but the company must also recognize income or expenses for adjustments such as depreciation, amortization, or tax reserves if those amounts change.
Companies have up to one year from the acquisition date, called the measurement period, to get the business combination numbers right. Valeant, however, has not adjusted income or expense in prior periods for the “measurement period adjustments” for any of its acquisitions since 2010. It’s not clear from its SEC filings whether Valeant is also avoiding a current period income statement impact when there are adjustments that it says have no “significant impact” on its consolidated results.
Read the rest here. I welcome comments and feedback.
Also last week, a company named Brixmor, a REIT, announced the resignations of its CEO, CFO, Chief Accounting Officer and an accounting staff person for what it said was immaterial but serious manipulation of a non-GAAP metric. I had a feeling there was more to the story —it’s always about the bonuses—and that hunch became a hypothesis after I listened to the conference call the company held after the announcement.
Sandler O’Neill managing director and senior REIT analyst Alex Goldfarb asked the audit committee chairman, Michael Berman, during the investor call on Monday to what extent the same-property NOI metric was tied to compensation. Goldfarb told MarketWatch, “It doesn’t make sense for two well-regarded people to risk their reputations for something so small. So I asked if this issue is tied to compensation.”
My story shows proof that the non-GAAP metric the company says the executives fudged with is essentially the same as a company-wide metric used for awarding cash bonuses. The company denies it, but I suspect we will soon see SEC action to disgorge these executives of their bonuses. There may never be a restatement to trigger Section 304 clawbacks and a Dodd-Frank clawback that would cover execs besides the CEO and CFO is not yet law.
Read more here.
Finally, a Bloomberg article leaked news of a potential SEC investigation of Boeing’s program accounting for the Dreamliner jet. The tip came from a whistleblower, according to the story. As a Chicago native I know Boeing is no stranger to whistleblowers or accounting shenanigans. It took less than an afternoon to put this together:
Left out of the story for length is a little more about a few more whistleblowers and sordid affairs that have tainted Boeing’s governance record over the years.
In October 2015 Boeing Company agreed to pay $18 million to settle a former employee’s whistleblower lawsuit filed in January 2013 that alleged Boeing falsely charged the government for time when its employees were not actually working on maintenance for the C-17 transport aircraft at its Long Beach Depot. The whistleblower alleged that Boeing filed claims between 2006 through 2013 that charged the government for eight-hour shifts without deducting the time employees spent taking lunch and other breaks. He received an award of receive a reward of $3.1 million.
In October of 2014 Boeing paid $23 million to settle allegations by the U.S. Department of Justice that it had defrauded taxpayers by exaggerating the bill between 2003 and 2007 for maintenance work on the same C-17 transport aircraft at its support center in San Antonio, Texas. Three former Boeing employee whistleblowers alleged that Boeing managers told contract workers to inflate labor costs. They brought the original suit in 2009 in federal court in San Antonio and received $3.9 million.
In 2005 Boeing’s former chief financial officer, Michael M. Sears, was sentenced to four months in jail after pleading guilty to a conflict-of-interest charge, for illegally hiring of an Air Force official who oversaw military contracts it was negotiating. Employment negotiations began while Darleen Druyun still worked at the Air Force overseeing Boeing contracts that included a controversial $23 billion tanker deal between the company and the military service. Druyun also pleaded guilty in the scheme.
The Pentagon postponed action on the $18 billion Air Force deal to acquire 100 Boeing 767 tankers, pending the investigation into hiring scandal. The Justice Dept., two investigative branches of the Defense Dept., and the Senate Armed Services Committee also investigated allegations that Boeing acted improperly, or even criminally, in its effort to win at least two multibillion-dollar aerospace defense contracts. The Pentagon also indefinitely suspended Boeing at that time from bidding on future rocket contracts pending a review of its ethics related to a scandal, from 1998 regarding the possession of 35,000 pages of Lockheed Martin Corp. documents during the 1998 competition for a military rocket-launch contract. Lockheed Martin sued Boeing over the alleged document theft.
Former Boeing Co. Chairman and CEO Phil Condit resigned in 2003 a week after the Sears hiring scandal became public. Condit was succeeded as CEO by Harry C. Stonecipher, who had retired from Boeing the year before. Fifteen months later, Stonecipher, 68 at the time, was ousted for “poor judgment that . . . impaired his ability to lead going forward,” said Lewis E. Platt, Boeing’s non-executive chairman at the time. The married Stonecipher had violated the company’s ethics rules by having an affair with a divorced Washington-based company vice-president.