GAO-03-138, Financial Statement Restatements: Trends, Market Impacts, Regulatory Responses, and Remaining Challenges


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Report to the Chairman, Committee on Banking, Housing, and Urban 

Affairs, U.S. Senate:



October 2002:



Financial Statement Restatements:



Trends, Market Impacts, Regulatory Responses, and Remaining Challenges:



GAO-03-138:



Letter:



Results in Brief:



Background:



The Number of Restatements Has Grown Significantly and Trends Emerge:



Restating Publicly Traded Companies Lost Billions of Dollars in Market 

Capitalization in the Days and Months Surrounding a Restatement 

Announcement:



Restatements and Accounting Issues Appear to Have Negatively Impacted 

Investor Confidence:



SEC Has Been Investigating an Increasing Number of Cases Involving 

Accounting-Related Issues:



The Growing Number of Accounting Problems in the Corporate Financial 

Reporting System Have Spurred Reforms:



Observations:



Agency Comments and Our Evaluation:



Appendixes:



Appendix I: Objectives, Scope, and Methodology:



Identifying the Number of and Reasons for Financial Statement 

Restatements:



Determining the Impact of Financial Statement Restatements on Market 

Values of Restating Companies:



Determining the Impact of Financial Statement Restatements on Investor 

Confidence:



Analysis of SEC’s Accounting-Related Enforcement Activities:



Appendix II: Comments from the Securities and Exchange Commission:



Appendix III: Listing of Financial Statement Restatement Announcements, 

1997-June 2002:



Appendix IV: Case Study Overview:



Business Overview:



Restatement Data:



Accounting/Auditing Firm:



Stock Prices:



Securities Analysts’ Recommendations:



Credit Rating Agency Actions Taken:



Legal and Regulatory Actions Taken:



Appendix V: Adelphia Communications Corporation:



Business Overview:



Restatement Data:



Accounting/Audit Firm:



Stock Price:



Securities Analysts’ Recommendations:



Credit Rating Agency Actions:



Legal and Regulatory Actions Taken:



Appendix VI: Aurora Foods Inc.:



Business Overview:



Restatement Data:



Accounting/Audit Firm:



Stock Price:



Securities Analysts’ Recommendations:



Credit Rating Agency Actions:



Legal and Regulatory Actions Taken:



Appendix VII: Critical Path, Inc.:



Business Overview:



Restatement Data:



Accounting/Audit Firm:



Stock Price:



Securities Analysts’ Recommendations:



Credit Rating Agency Actions:



Legal and Regulatory Actions Taken:



Appendix VIII: Enron Corporation: 



Business Overview:



Restatement Data:



Accounting/Audit Firm:



Stock Price:



Securities Analysts’ Recommendations:



Credit Rating Agency Actions:



Legal and Regulatory Actions Taken:



Appendix IX: Hayes Lemmerz International, Inc.



Business Overview:



Restatement Data:



Accounting/Audit Firm:



Stock Price:



Securities Analysts’ Recommendations:



Credit Rating Agency Actions:



Legal and Regulatory Actions Taken:



Appendix X: JDS Uniphase Corporation:



Business Overview:



Restatement Data:



Accounting/Audit Firm:



Stock Price:



Securities Analysts’ Recommendations:



Credit Rating Agency Actions:



Legal and Regulatory Actions Taken:



Appendix XI: MicroStrategy Incorporated:



Business Overview:



Restatement Data:



Accounting/Audit Firm:



Stock Price:



Securities Analysts’ Recommendations:



Credit Rating Agency Actions:



Legal and Regulatory Actions Taken:



Appendix XII: Oribtal Sciences Corporation: 



Business Overview:



Restatement Data:



Accounting/Audit Firm:



Stock Price:



Securities Analysts’ Recommendations:



Credit Rating Agency Actions:



Legal and Regulatory Actions Taken:



Appendix XIII: Rite Aid Corporation: 



Business Overview:



Restatement Data:



Accounting/Audit Firm:



Stock Price:



Securities Analysts’ Recommendations:



Credit Rating Agency Actions:



Legal and Regulatory Actions Taken:



Appendix XIV: Safety-Kleen Corporation:



Business Overview:



Restatement Data:



Accounting/Audit Firm:



Stock Price:



Securities Analysts’ Recommendations:



Credit Rating Agency Actions:



Legal and Regulatory Actions Taken:



Appendix XV: SeaView Video Technology, Inc.:



Business Overview:



Restatement Data:



Accounting/Audit Firm:



Stock Price:



Securities Analysts’ Recommendations:



Credit Rating Agency Actions:



Legal and Regulatory Actions Taken:



Appendix XVI: Shurgard Storage Centers, Inc.:



Business Overview:



Restatement Data:



Accounting/Audit Firm:



Stock Price:



Securities Analysts’ Recommendations:



Credit Rating Agency Actions:



Legal and Regulatory Actions Taken:



Appendix XVII: Sunbeam Corporation:



Business Overview:



Restatement Data:



Accounting/Audit Firm:



Stock Price:



Securities Analysts’ Recommendations:



Credit Rating Agency Actions:



Legal and Regulatory Actions Taken:



Appendix XVIII: Thomas & Betts Corporation:



Business Overview:



Restatement Data:



Accounting/Audit Firm:



Stock Price:



Securities Analysts’ Recommendations:



Credit Rating Agency Actions:



Legal and Regulatory Actions Taken:



Appendix XIX: Waste Managment, Inc.



Business Overview:



Restatement Data:



Accounting/Audit Firm:



Stock Price:



Securities Analysts’ Recommendations:



Credit Rating Agency Actions:



Legal and Regulatory Actions:



Appendix XX: Xerox Corporation:



Business Overview:



Restatement Data:



Accounting/Audit Firm:



Stock Price:



Securities Analysts’ Recommendations:



Credit Rating Agency Actions:



Legal and Regulatory Actions Taken:



Appendix XXI: Listing of Accounting and Auditing Enforcement

Releases (AAER):



Appendix XXII: Frequently Cited Violations



Appendix XXIII: Side-by-Side of the Existing Corporate Governance

and Oversight Structure and the Sarbanes-Oxley Act of 2002:



Appendix XXIV: GAO Contacts and Staff Acknowledgements:



GAO Contacts:



Acknowledgments:



Glossary:



Tables:



Table 1: Number of Listed Restating Companies as a Percent of Average 

Listed Companies, 1997-2002:		



Table 2: Restatement Category Descriptions:		



Table 3: Summary of Immediate Market Impact on Restating Companies, 

1997-2002:



Table 4: Restating Companies’ Immediate Market Losses Compared with 

Total Stock Market Capitalization, 1997-2002:		



Table 5: Summary of Intermediate Market Impact on Restating Companies, 

1997-2002: 



Table 6: Rule 102(e) and Cease and Desist Actions Against CPAs and 

Accounting Firms, January 2001-February 2002:



Table 7: NYSE Rules 472 and 351 and NASD Rule 2711 Changes Affecting 

Securities Analysts: 



Table 8: Case Studies:



Table 9: Selected Financial Data, 1999-2001:	



Table 10: Selected Financial Data, 1998-1999:



Table 11: Selected Financial Data, 2000-2001:



Table 12: Selected Financial Data 1997-2001:



Table 13: Selected Financial Data, 1999-2001:



Table 14: Selected Financial Data, March 2001:



Table 15: Selected Financial Data, 1997-1999:



Table 16: Selected Financial Data 1995-1999:		



Table 17: Selected Financial Data, 1997-2000: 		



Table 18: Selected Financial Results, 1997-1999:		



Table 19: Selected Financial Data, 2000:		



Table 20: Selected Financial Data, 1998-2001:		



Table 21: Selected Financial Data, 1996 - 1998:		



Table 22: Selected Financial Data, 1996-2000:		



Table 23: Selected Financial Data, 1992-1999:		



Table 24: Selected Financial Data, 1997-2000:		



Table 25: Listing of AAER Cases, January 2001-June 2002:		



Table 26: Accounting and Auditing Related Federal Securities Laws or 

Rules Violations: 		



Table 27: Side-by-Side Comparison of Existing Structure and New 

Sarbanes-Oxley Structure:		



Figures:



Figure 1: Total Number of Restatement Announcements Identified, 1997-

2002:



Figure 2: Percent of Listed Companies Restating, 1997-2002:



Figure 3: Restatements by Reason, 1997-June 2002:



Figure 4: Who Prompted Restatements, 1997-June 2002:



Figure 5: Immediate Market Impact on Market Capitalization of Restating 

Companies by Restatement Reason, January 1, 1997-March 27, 2002:



Figure 6: UBS/Gallup Investor Optimism Index, October 1996-August 2002:



Figure 7: Effect of Accounting Concerns on Investor Confidence in the 

Stock Market, February 2002-July 2002:



Figure 8: Equity Mutual Fund Net Flows, June 2001-July 2002:



Figure 9: SEC Enforcement Process:



Figure 10: Number of AAERs and Total SEC Enforcement Actions Initiated, 

1990-2001:



Figure 11: Existing System of Corporate Governance and Accounting 

Oversight Structures:



Figure 12: Daily Stock Prices for Adelphia, December 1, 2001-May 14, 

2002:



Figure 13: Daily Stock Prices for Aurora, October 1, 1999--October 31, 

2000:



Figure 14: Daily Stock Prices for Critical Path, August 1, 2000-August 

31, 2001:



Figure 15: Daily Stock Prices for Enron, May 1, 2001-June 28, 2002:



Figure 16: Daily Stock Prices for Hayes, March 1, 2001-December 6, 
2001:



Figure 17: Daily Stock Prices for JDS Uniphase, October 2, 2000-October 

31, 2001:



Figure 18: Daily Stock Prices for MicroStrategy, September 1, 1999-

September 29, 2000:



Figure 19: Daily Stock Prices for Orbital, August 3, 1998-September 29, 

2000:



Figure 20: Daily Stock Prices for Rite Aid, December 1, 1998-December 

31, 1999:



Figure 21: Daily Stock Prices for Safety-Kleen, September 1, 1999-June 

9, 2000:



Figure 22: Daily Stock Prices for SeaView, September 1, 2000-June 28, 

2002:



Figure 23: Daily Stock Prices for Shurgard, May 1, 2001-April 30, 2002:



Figure 24: Daily Stock Prices for Sunbeam, December 1, 1997-December 
31, 

1998:



Figure 25: Daily Stock Prices for Thomas & Betts, April 1, 1999 - April 

30, 2000:



Figure 26: Daily Stock Prices for Thomas & Betts, February 1, 2000-

February 28, 2001:



Figure 27: Daily Stock Prices for Waste Management, May 1, 1997-May 29, 

1998:



Figure 28: Daily Stock Prices for Waste Management, February 1, 1999-

February 29, 2000:



Figure 29: Daily Stock Prices for Xerox, November 1, 2000-June 28, 
2002:



Abbreviations:



AAER: Accounting and Auditing Enforcement Release:



AICPA: American Institute of Certified Public Accountants:



Amex: American Stock Exchange:



ASB: Auditing Standards Board:



CEO: chief executive officer:



CFO: chief financial officer:



CPA: certified public accountant:



CRS: Congressional Research Service:



FAF: Financial Accounting Foundation:



FASB: Financial Accounting Standards Board:



FEI: Financial Executive International:



GAAP: generally accepted accounting principles:



GAAS: generally accepted auditing standards:



GAO: General Accounting Office:



IPO: initial public offering:



IPR&D: in-process research and development:



NASD: National Association of Securities Dealers:



Nasdaq: National Association of Securities Dealers Automated Quotation:



NASDR: National Association of Securities Dealers Regulation:



NRSRO: nationally recognized statistical rating organization:



NYSE: New York Stock Exchange:



OTC: over-the-counter:



PEEC: Professional Ethics Executive Committee:



POB: Public Oversight Board:



PwC: PricewaterhouseCoopers:



RPAF: registered public accounting firm:



SAB: staff accounting bulletin:



SEC: Securities and Exchange Commission:



SECPS: SEC Practice Section:



SOP: statement of position:



SRO: self-regulatory organization:



TAQ: trade and quote:



Letter October 4, 2002:



The Honorable Paul S. Sarbanes

Chairman, Committee on Banking,

Housing, and Urban Affairs

United States Senate:



Dear Mr. Chairman:



A number of well-publicized announcements about financial statement 

restatements[Footnote 1] by large, well-known public companies such as 

Xerox, Enron, and WorldCom have erased billions of dollars of 

previously reported earnings and raised questions about the credibility 

of accounting practices and the quality of corporate financial 

disclosure and oversight in the United States. Industry officials and 

academics have speculated that several factors may have caused U.S. 

companies to use questionable accounting practices, including (1) 

corporate pressure to meet quarterly earnings projections and thus 

maintain stock prices during and after the market expansion of the 

1990s, (2) perverse executive compensation incentives, (3) outdated 

accounting and rule-based standards, and (4) complex corporate 

financing arrangements. Industry officials also have testified that 

public accounting firms’ independence has been compromised and that 

they may have faced some pressure to agree with, or ignore, 

questionable accounting practices in order to keep some clients’ 

business. Some of these officials added that increased focus and 

guidance by the Securities and Exchange Commission (SEC or Commission) 

on accounting issues in the late 1990s may have prompted more companies 

to restate previously reported financial statements.



You asked us to (1) determine the number of, reasons for, and other 

trends in financial statement restatements since 1997; (2) analyze the 

impact of restatement announcements on the restating companies’ stock 

market capitalization; (3) research available data to determine the 

impact of financial statement restatements on investors’ confidence in 

the existing U.S. system of financial reporting and capital markets; 

(4) analyze SEC enforcement actions involving accounting and auditing 

irregularities; and (5) describe the major limitations of the existing 

oversight structure and steps that have been and are being taken to 

ensure the integrity of corporate financial disclosures and ongoing 

challenges.



To identify financial statement restatements, we used Lexis-Nexis, an 

online periodical database, to search for restatement announcements 

using variations of the word “restate.” We then identified and 

collected information on 919 financial statement restatements announced 

by 845 public companies from January 1, 1997, to June 30, 2002, that 

involved accounting irregularities[Footnote 2] resulting in material 

misstatements of financial results. We included only announced 

restatements that were being made to correct previous material 

misstatements of financial results. Therefore, our database excludes 

announcements involving stock splits, changes in accounting principles, 

and other financial statement restatements that were not made to 

correct mistakes in the application of accounting standards. While 

several other studies have used similar methodology, there is no known 

authoritative restatement list against which to compare the 

completeness of our list. However, we cross-checked portions of our 

list with lists compiled by SEC, the Congressional Research Service, 

and others when this information was available.[Footnote 3] We also 

reviewed SEC filings to verify the accuracy of particular restatement 

announcement dates.



To determine the immediate impact on stock prices, we analyzed 689 of 

the 919 restatements that were announced from January 1, 1997, to March 

26, 2002, to determine why restatements occurred and collected 

information on other characteristics of the restatement trends. We 

excluded 230 cases because (1) they involved stocks not listed on the 

New York Stock Exchange (NYSE), the National Association of Securities 

Dealers Automated Quotation (Nasdaq), or the American Stock Exchange 

(Amex); (2) they involved announcements made after March 26, 

2002;[Footnote 4] or (3) they were missing data for the relevant time 

period due to trading suspensions, bankruptcies, and mergers, among 

other things. For each of these 689 cases, we analyzed the company’s 

stock price on the trading day before, the trading day of, and the 

trading day after the announcement date in order to assess the 

immediate impact and calculate the change in market capitalization. We 

also analyzed the intermediate impact (60 trading days before and after 

the restatement announcement date) for 575 restatements. This 

calculation required 3 months of trading data before and after the 

announcement date; therefore, we excluded an additional 114 

restatements because the announcement was made after December 31, 

2001,[Footnote 5] the restating companies filed for bankruptcy, or data 

were missing for the relevant time period. In both the immediate and 

intermediate calculations, we attempted to adjust for overall market 

movements, such as the general decline in the stock market since 2000. 

We also did additional analyses on the cases that were excluded from 

the immediate and intermediate impact analyses due to missing data to 

determine the immediate and intermediate impact on market 

capitalization. We also reviewed survey and other empirical data and 

obtained the views of industry experts on investor confidence and 

participation in U.S. capital markets.



To obtain information about the recent enforcement actions SEC has 

taken to address accounting and auditing irregularities, we collected 

information on SEC’s enforcement process, reviewed available SEC 

information, and analyzed SEC’s enforcement activity involving 

accounting irregularities from January 1, 2001, to February 28, 2002. 

Finally, we reviewed the current and proposed approaches to corporate 

governance oversight and disclosure in order to determine gaps in 

oversight and needed reforms. For additional information on our scope 

and methodology, see appendix I.



We conducted our work in Washington, D.C., between February and 

September 2002 in accordance with generally accepted government 

auditing standards.



Results in Brief:



While the number of restating companies continues to make up a small 

percentage of all publicly listed companies annually, the number of 

restatements due to accounting irregularities grew significantly--

about 145 percent--from January 1997 through June 2002. Based on the 

number of restatements as of June 30, 2002, we expect the increase to 

exceed 170 percent by the end of the year. The number of financial 

statement restatements identified each year rose from 92 in 1997 to 225 

in 2001. The proportion of listed companies on NYSE, Amex, and Nasdaq 

identified as restating their financial reports tripled from less than 

0.89 percent in 1997 to about 2.5 percent in 2001 and may reach almost 

3 percent by the end of 2002. From January 1997 through June 2002, 

about 10 percent of all listed companies announced at least one 

restatement. Among the restating companies that we identified, the 

number of large company restatements had grown rapidly since 

1997.[Footnote 6] The average (median) size by market capitalization of 

a restating company increased from $500 million ($143 million) in 1997 

to $2 billion ($351 million) in 2002.[Footnote 7] In addition, of the 

125 public companies that announced restatements due to accounting 

irregularities in 2002, 54 were listed on Nasdaq and 53 were listed on 

NYSE, which generally lists more large companies than any other stock 

market.[Footnote 8] The 845 restating companies we identified had 

restated their financial statements for many reasons--for example, to 

adjust revenue, costs or expenses, or to address securities-related 

issues. From January 1997 to June 2002, issues involving revenue 

recognition (misreported or nonreported revenue) accounted for almost 

38 percent of the 919 announced restatements; revenue recognition was 

also the primary reason for restatement each year. Finally, in 

reviewing the restatements, we found different parties can prompt a 

restatement, including the restating company, an external auditor, or 

SEC.



The 689 publicly traded companies we identified that announced 

financial statement restatements between January 1997 and March 2002 

lost billions of dollars in market capitalization in the days around 

the initial restatement announcement. For example, from the trading day 

before through the trading day after an initial restatement 

announcement, stock prices of the restating companies that we analyzed 

fell almost 10 percent on average (market adjusted). We estimate that 

the restating companies lost about $100 billion in market 

capitalization, which is significant for the companies and shareholders 

involved but represents less than 0.2 percent of the total market 

capitalization of NYSE, Nasdaq, and Amex. However, these losses had 

potential ripple effects on overall investor confidence and market 

trends. Restatements involving revenue recognition led to greater 

market losses than other types of restatements. For example, although 

restatements involving revenue recognition accounted for 39 percent of 

the 689 restatements analyzed, over one-half of the total immediate 

losses were attributable to revenue recognition-related restatements. 

Although longer-term losses (60 trading days before and after) are more 

difficult to measure, there is some evidence that restatement 

announcements appear to have had an even greater negative impact on 

stock prices over longer periods.



The growing number of restatements and mounting questions about certain 

corporate accounting practices appear to have shaken investors’ 

confidence in our financial reporting system. Although determining the 

effect of financial statement restatements and other accounting issues 

on overall investor confidence is difficult to measure (because so many 

factors go into making investment decisions), various attempts to 

measure investor confidence have been made. For example, a UBS/Gallup 

survey-based index that asks questions aimed at measuring investor 

confidence indicates that people cited accounting practices as a 

serious problem and that these practices have negatively impacted 

securities markets.[Footnote 9] However, Yale University calculates 

four survey-based indexes that ask different questions that generally 

indicate that investor confidence in the markets has been largely 

unaffected as of June 2002.[Footnote 10] Other sources such as 

empirical research studies and academic experts generally suggest 

accounting issues have negatively affected overall investor confidence 

and raised questions about the integrity of U.S. markets.



With the increase in the number of restatements due to accounting 

irregularities, almost 20 percent of SEC’s enforcement cases since the 

late 1990s were for violations resulting from financial reporting and 

accounting practices. An SEC official said that about half of these 

enforcement cases involved revenue recognition violations. Of the 150 

accounting-related cases brought from January 1, 2001, to February 28, 

2002, about 75 percent were brought against public companies or their 

directors, officers, and employees; the other 25 percent of the cases 

involved accounting firms and certified public accountants (CPA). To 

address such violations, SEC has sought a variety of penalties against 

these companies and individuals, including levying monetary sanctions, 

issuing cease-and-desist orders, and barring individuals from appearing 

before SEC or serving as officers or directors in public 

companies.[Footnote 11] Slightly more than half of the enforcement 

proceedings initiated were administrative, involving allegations that a 

firm or individual had violated GAAP or that an individual had caused a 

firm or other individuals to act unlawfully. The remainder of the 

enforcement proceedings initiated were civil judicial actions, usually 

cases involving securities fraud.



The recent increase in the number and size of financial statement 

restatements and disclosures of accounting issues and irregularities 

underlying these restatements have raised significant questions about 

the adequacy of the current system of corporate governance and 

financial disclosure oversight. In addition to public companies, their 

auditors, and SEC, investors rely on a variety of parties for oversight 

and financial information, including stock markets, securities 

analysts, and credit rating agencies, all of which have roles in the 

corporate governance system or provide information to the investing 

public. However, recent events have raised concerns about the roles 

played by each of these parties. In response, Congress, the President, 

SEC, the exchanges, and others have begun taking action to attempt to 

strengthen corporate governance and financial reporting. Most 

significantly, on July 30, 2002, the Sarbanes-Oxley Act was 

enacted.[Footnote 12] The act addresses many of these concerns, 

including strengthening corporate governance and improving 

transparency and accountability to help ensure the accuracy and 

integrity of the financial reporting system. In addition, the act 

authorizes additional funding for SEC, which as we reported in March 

2002, has faced staffing and workload imbalances that have challenged 

its ability to fulfill its mission.[Footnote 13] Effectively managing 

its human capital resources, technology, and processes is likely to 

remain a challenge for SEC in the future, especially for regulatory 

activities involving oversight of public company disclosures and 

financial fraud-related enforcement.



The Sarbanes-Oxley Act addresses many of the concerns we have raised 

over the years involving corporate governance, auditor independence, 

regulation and oversight of the accounting profession, and SEC’s 

resource limitations.[Footnote 14] However, the fundamental principles 

of setting up the right incentives, providing adequate transparency, 

and ensuring full accountability are even more relevant as the new 

structure is being established. SEC must help ensure that corporate 

managers are held accountable for corporate financial reporting. 

Likewise, effective governance structures composed of highly qualified 

individuals are key to the success of any organization and system on 

which others must rely. In this regard, keys to successful 

implementation of this new structure include ensuring that (1) highly 

qualified individuals are appointed to the Public Company Accounting 

Oversight Board (Board) and that they fully embrace the principles 

articulated in the act and the need for reform, (2) the Board provides 

active leadership and ongoing input to the profession, (3) the Board 

ensures meaningful audit standards are adopted, and (4) the Board 

punishes wrongdoers appropriately.



We requested comments on the entire draft from the Chairman, SEC. SEC 

provided written comments. SEC noted that the report was thorough and 

reiterated several of our major findings. SEC stated that it is fully 

committed to the rule-making and other activities needed to fully 

implement “the letter and spirit of the [Sarbanes-Oxley] Act.” SEC 

added that it is particularly mindful of our observations concerning 

the selection of members and implementation of the Board. SEC also 

expressed its commitment--given the additional resources that the 

Sarbanes-Oxley Act identified as necessary for SEC to carry out its 

responsibilities and its internal resolve--to meet its ongoing human 

capital, technology, and process challenges. We have reprinted SEC’s 

written comments in appendix II, and we discuss them in greater detail 

near the end of this letter.



We also obtained comments from officials at the National Association of 

Securities Dealers (NASD), Nasdaq, NYSE, and Amex on selected excerpts 

of a draft of this report. Finally, we obtained comments from officials 

at several of the companies selected as case studies in this report. We 

have incorporated their comments as appropriate.



Background:



The Securities Act of 1933 (Securities Act) and the Securities Exchange 

Act of 1934 (Exchange Act) establish the principle of full disclosure, 

which requires that investors receive sufficient information on 

investment opportunities to help them make informed investment 

decisions. The Securities Act requires that a public offering of 

securities be registered with SEC. Although the Securities Act 

establishes a full disclosure regulatory requirement applicable to the 

initial offering of securities, it does not require any periodic 

reporting thereafter. The Exchange Act, designed to facilitate 

subsequent trading of securities by investors, requires public 

companies to comply with certain periodic reporting requirements to 

ensure an ongoing flow of meaningful information that investors can use 

in making investment decisions. To fulfill its mission, SEC also 

reviews certain offering documents and periodic filings of selected 

companies to determine whether they contain the required information.



The self-regulatory structure is premised on the concept of corporate 

governance. Officers and directors of a public company are responsible 

for ensuring that the preparation and content of financial statements 

fully and accurately depict the company’s financial condition and the 

results of its activities. However, the board of directors--

particularly the audit committee--and the public company’s internal 

auditor play important roles in oversight. The primary role of the 

corporate board of directors is to oversee the management of a company 

and to protect the interests of its shareholders. Internal auditors 

offer another internal check on the operations and control systems 

within a company. Independent external auditors are to provide an 

additional safeguard in connection with all public companies and many 

other entities.



All public companies registered with SEC are required to have their 

financial statements audited by an independent public accountant. 

Although a public company’s management is responsible for the 

preparation and content of the public company’s financial statements, 

the independent external auditor is responsible for auditing the 

financial statements in accordance with generally accepted auditing 

standards (GAAS). The purpose of the audit is to provide reasonable 

assurance that a company’s financial statements are fairly presented in 

all material respects in accordance with GAAP. As we testified before 

the Senate Committee on Banking, Housing, and Urban Affairs on March 5, 

2002, for over 70 years, the public accounting profession, through its 

independent audit function, has played a critical role in enhancing a 

financial reporting process that facilitates the effective functioning 

of our capital markets.[Footnote 15] Independent audits give the public 

confidence that issuers’ financial statements are reliable and 

contribute to an efficient market for public companies’ securities. 

This sense of confidence can exist only if reasonable investors 

perceive auditors as independent and expert professionals who have 

neither interests in the entities they are auditing nor other conflicts 

of interest. Investors and other users expect auditors to bring 

integrity, independence, objectivity, and professional competence to 

the financial reporting process, and to prevent the issuance of 

misleading financial statements.



SEC has traditionally relied on the private sector to set standards for 

financial reporting and independent audits, retaining largely oversight 

responsibilities. As mentioned earlier, the Securities Act and the 

Exchange Act require companies that sell securities in the United 

States to register with SEC and make periodic filings disclosing the 

companies’ financial status and changes in condition. Although the 

registration process requires the accuracy of the facts represented in 

the registration statements and prospectuses, this registration process 

does not guarantee accuracy. As part of its oversight of the 

registration and filing process, SEC staff review selected issuers’ 

filings for compliance with accounting and disclosure requirements. 

Disclosure documents include:



* registration statements for new offers of securities,



* proxy materials sent to shareholders before an annual meeting,



* annual reports to shareholders,



* quarterly statements of financial condition,



* current reports on significant occurrences,



* documents concerning tender offers, and:



* filings related to mergers and acquisitions.



SEC’s review of corporate filings may be a full review, a full 

financial review, or monitoring of certain filings for specific 

disclosure items.[Footnote 16] SEC’s Division of Corporation Finance 

(CorpFin) is responsible for this function and reviews filings on a 

selective basis. CorpFin performs full reviews of financial 

information, public disclosures, and related filings, as appropriate, 

for substantially all registrations of initial public offerings (IPO) 

of securities. As reported in our March 2002 report on SEC’s 

operations, during the 1990s, the number of IPOs grew substantially, 

which contributed to a 59 percent increase in corporate filings from 

1991 to 2000.[Footnote 17] Full reviews are also required for all 

current reports of a change in a registrant’s certifying accountant. 

Experienced staff select or “screen” other filings for review on the 

basis of certain financial and qualitative screening criteria. SEC’s 

goal in 2001 was to perform a full financial review--a review of the 

companies’ financial statements, related footnotes, and management’s 

discussion and analysis of financial condition and results of 

operations--of about one-third of all public companies’ annual 

reports.[Footnote 18] Earlier this year, we reported that SEC reviewed 

half that amount in 2001. Finally, using screening criteria, 

experienced staff may select other filings for monitoring, which 

involves reviewing a specific portion of the filing.



The stock exchanges and markets, which are self-regulatory 

organizations (SRO)[Footnote 19] whose registrations are approved by 

SEC under the Exchange Act, also have an oversight role. A stock 

exchange or market establishes listing standards, which are minimum 

quantitative and qualitative requirements that companies must meet for 

their stock to be eligible for initial and continued listing for 

trading. Listing standards prescribe the corporate governance 

structures and accounting and auditing regulations that companies 

listed on a stock exchange or market are expected to follow. For 

example, listing requirements generally address conflicts of interest 

by corporate insiders, the composition of audit committees, and 

shareholder approval of corporate actions. The large exchanges also 

require their listed companies to have boards of directors with an 

independent audit committee to, among other duties, oversee the 

company’s internal controls over financial reporting processes.



Securities analysts, through their research and stock recommendations, 

play an important role in providing investors with information that may 

affect investment decisions. Analysts typically research the current 

and prospective financial condition of certain publicly traded 

companies and make recommendations about investing in those companies’ 

securities based on their research. This research is likely to include 

all publicly available information about the company and its 

businesses, including financial statements; research on the company, 

industry, product or sector; and public statements by and interviews 

with executives of the company and its customers and suppliers. The 

analysis and opinions are generally presented on a relative basis and 

compare companies’ performance within a sector or industry.



Credit ratings produced by rating agencies are widely circulated; many 

investors rely on these ratings to make investment decisions. These 

ratings include opinions about the creditworthiness of certain public 

companies and their financial obligations, including bonds, preferred 

stock, and commercial paper. The credit ratings that result from 

analyses of this information can affect securities markets in a number 

of important ways, including an issuer’s access to and cost of capital, 

the structure of financial transactions, and the ability of certain 

entities to invest in certain rated obligations. According to SEC, the 

importance of credit ratings in securities markets has increased 

significantly as markets have become more complex. Although rating 

agencies, as a matter of policy, may rate the debt of certain large 

corporate issuers, any company can hire a rating agency to rate its 

debt before the debt is issued. Credit rating agencies rely on a 

variety of public and nonpublic information, including company 

presentations, audited and interim financial statements, and other 

relevant industry materials. Pursuant to the Investment Advisers Act of 

1940, as amended, (Advisers Act),[Footnote 20] Nationally Recognized 

Statistical Rating Organizations (NRSRO)[Footnote 21] register as 

investment advisers, are required to have an adequate basis for their 

ratings, and are prohibited from having undisclosed conflicts with 

respect to the ratings.



The Number of Restatements Has Grown Significantly and Trends Emerge:



Although on a yearly basis the number of companies restating their 

financial statements due to accounting irregularities makes up only a 

small percentage of publicly listed companies, we found that the number 

of restatements has grown significantly since 1997. In addition, of the 

919 announced restatements we identified (app. III), the percentage of 

large companies restating has grown rapidly since 1997. Whether large 

or small, companies restate their financial results for varying 

reasons, but we identified revenue recognition as the most frequently 

cited reason for restating. Finally, in reviewing these restatement 

announcements, we found that different parties can prompt a 

restatement, including the restating company’s management, an external 

auditor, or SEC.



The Number of Restatements Has Grown, but Restating Companies Make Up a 

Small Portion of Listed Companies:



The number of announcements of financial statement restatements has 

increased significantly each year, rising from 92 in 1997 to 225 in 

2001--an increase of approximately 145 percent (fig. 1). Based on the 

number of restatement announcements we have identified for the first 

half of 2002, we project the increase since 1997 to rise to more than 

170 percent by the end of 2002.



Figure 1: Total Number of Restatement Announcements Identified, 1997-

2002:



[See PDF for image]



Notes: Includes restatement announcements by public companies traded on 

the over-the-counter (OTC) bulletin board and on Pink Sheets. Also, 

note that the 2002 figure is estimated based on 125 restatement 

announcements collected through June 2002.



Source: GAO’s analysis of relevant press releases and SEC filings.



[End of figure]



While the average number of companies listed on NYSE, Nasdaq, and Amex 

decreased 20 percent from 9,275 in 1997 to 7,446 in 2002, the number of 

listed companies restating their financials increased from 83 in 1997 

to a projected 220 in 2002 (a 165 percent increase) (table 1). Based on 

these projections, the proportion of listed companies restating on a 

yearly basis is expected to more than triple from 0.89 percent in 1997 

to almost 3 percent by the end of 2002. In total, the number of 

restating companies is expected to represent about 10 percent of the 

average number of listed companies from 1997 to 2002.



Table 1: Number of Listed Restating Companies as a Percent of Average 

Listed Companies, 1997-2002:



Year: 1997; Number of companies listed: 9,275; Number of listed 

companies restating: 83; Percent of listed companies restating: 0.89%.



Year: 1998; Number of companies listed: 9,179; Number of listed 

companies restating: 94; Percent of listed companies restating: 1.02.



Year: 1999; Number of companies listed: 8,739; Number of listed 

companies restating: 151; Percent of listed companies restating: 1.73.



Year: 2000; Number of companies listed: 8,534; Number of listed 

companies restating: 171; Percent of listed companies restating: 2.00.



Year: 2001; Number of companies listed: 7,902; Number of listed 

companies restating: 195; Percent of listed companies restating: 2.47.



Year: 2002; Number of companies listed: 7,446; Number of listed 

companies restating: 220; Percent of listed companies restating: 2.95.



Year: 1997-2002; Number of companies listed: 8,494; Number of listed 

companies restating: 845; Percent of listed companies restating: 9.95.



Notes: The number of listed companies (NYSE-, Nasdaq-, and Amex-listed 

companies) for each year 1997 to 2002 are based on monthly averages. 

The number of listed companies for 2002 is as of June 30. The total 

number of listed companies restating in 2002 is estimated based on the 

110 unique companies identified through June 2002. Companies that 

restated more than one time are counted only once. Also, note that the 

number of listed companies restating differs from the total number of 

restatements because not all companies that restated were listed on 

NYSE, Nasdaq, or Amex. For example, in 1997 there were 92 restatements; 

however, 8 were attributed to companies trading OTC and 1 company 

restated twice, leaving 83 listed companies identified as restating.



Source: GAO’s analysis of restatement announcements and Nasdaq.:



[End of table]



A number of research reports also found that financial statement 

restatements had increased since 1997. Each of the reports used 

somewhat different search methodologies and included slightly different 

types of restatements but arrived at similar conclusions. Financial 

Executives International (FEI) and M. Wu (2001) identified 523 

restatements from 1997 to 2000 and noted a significant increase in 

restatements from 1997 to 1998 and continuing increases from 1999 to 

2000.[Footnote 22] The Huron Consulting Group (2002) identified 993 

financial statement restatements from 1997 to 2001; it also found that 

the number of restatements increased substantially from 1997 to 

2001.[Footnote 23] The former SEC chief accountant and several 

accounting fellows also found an increase in the number of financial 

statement restatements from 1997 to 1999.[Footnote 24]:



The Percentage of Large Companies Restating Has Grown Since 1997:



Until recently, restatements due to accounting irregularities were seen 

as primarily affecting small companies and the technology industry. 

However, for the restatements we identified, the number of large 

companies restating their financial statements has increased 

significantly. Based on total assets, large companies as a percent of 

the total restating companies have increased from about 25 percent in 

1997 to over 30 percent in 2001.[Footnote 25] Generally, for the past 2 

years, the number of large and small companies restating has been 

equal. Likewise, the average (median) market capitalization of a 

restating company has grown from about $500 million ($143 million) in 

1997 to $2 billion ($351 million) in 2002.[Footnote 26] While the 

average size of listed companies increased about 60 percent from 1997 

to 2002, the average size of companies restating their financials grew 

over 300 percent. (The median grew about 146 percent.) Moreover, as the 

average size of U.S. companies fell during the period from 1999 to 

2002, the average size of restating companies continued to increase.



Another indication that the size of companies restating has increased 

is the growing number of NYSE-listed companies identified as restating. 

This result is attributable to the fact that more large companies are 

listed on NYSE than the other stock markets.[Footnote 27] Nasdaq has on 

average 62 percent more companies listed on its market than NYSE. 

Historically more Nasdaq-listed companies restated due to accounting 

irregularities than NYSE-listed companies.[Footnote 28] For example, in 

1997, 21 NYSE-listed companies had announced restatements; by 2001, the 

number had increased to 80, an almost fourfold increase. During the 

same time, the number of Nasdaq-listed companies announcing 

restatements almost doubled from 61 to 113. Also during the same time, 

the number of Amex-listed companies restating increased from two to 

eight. However, during the first half of 2002, the 125 restatements 

attributable to companies listed on NYSE and Nasdaq were almost evenly 

split at 53 and 54, respectively, even though more companies are listed 

on Nasdaq. The remaining restating companies were listed on Amex.



As figure 2 illustrates, for the announced restatements we identified, 

the percentage of all NYSE-, Nasdaq-, and Amex-listed companies that 

restated due to accounting irregularities increased between 1997 and 

June 2002. In 1997, less than 1 percent of NYSE-listed companies 

restated for accounting irregularities. However, since about 2000, the 

percentage of NYSE-listed companies restating has risen at a faster 

rate that the percentage of Nasdaq-and Amex-listed companies restating, 

rising to over 3.5 percent of all NYSE listings in 2002. Moreover, 

beginning in 2001, the percentage of NYSE-listed companies restating 

exceeded the percentage of Nasdaq-listed companies. Based on the number 

of restatements announced for the first half of 2002, we project that 

the percentage of NYSE-listed companies restating will continue to 

increase faster than the percentage of companies listed on Nasdaq and 

Amex throughout 2002.



Figure 2: Percent of Listed Companies Restating, 1997-2002:



[See PDF for image]



Note: The 2002 figures are estimated based on data collected through 

June 2002.



Source: GAO’s analysis of selected NYSE, Nasdaq, and Amex data on 

listed companies.



[End of figure]



Revenue Recognition Is the Leading Reason for Restatements:



Although public companies restate their financials for a variety of 

reasons, revenue recognition was the reason for 38 percent of the 919 

announced restatements we identified (fig. 3).[Footnote 29] 

Restatements due to revenue recognition generally include a company 

recognizing revenue sooner or later than would have been allowed under 

GAAP or recognizing questionable or fictitious revenue. For example, 

some of the companies identified as restating because of revenue 

recognition had prematurely recognized revenue. Cost or expense-related 

issues were the next most frequently identified reason, accounting for 

almost 16 percent of all the restatements we identified. (See table 2 

for a description of each reason.) These types of restatements include 

instances of improper cost recognition, tax issues, and other cost-

related improprieties that led to financial misstatements. For example, 

the recent WorldCom announcement that it had incorrectly recorded 

certain operating expenses as capital expenditures, effectively 

overstating net income, was considered a cost or expense-related 

restatement.[Footnote 30]



Figure 3: Restatements by Reason, 1997-June 2002:



[See PDF for image]



Note: Our database includes announced restatements that were being made 

to correct previous material misstatements of financial results. 

Therefore, our database excludes announcements involving stock splits, 

changes in accounting principles, and other financial statement 

restatements that were not made to correct mistakes in the application 

of accounting standards.



Source: GAO’s analysis of initial restatement announcements due to 

accounting irregularities.



[End of figure]



Table 2: Restatement Category Descriptions:



Category: Acquisitions and mergers; Description: Restatements of 

acquisitions or mergers that were improperly accounted for or not 

accounted for at all. These include instances in which the wrong 

accounting method was used or losses or gains related to the 

acquisition were understated or overstated. This does not include in-

process research and development or restatements for mergers, 

acquisitions, and discontinued operations when appropriate accounting 

methods were employed.



Category: Cost or expense; Description: Restatements due to improper 

cost accounting. This category includes instances of improperly 

recognizing costs or expenses, improperly capitalizing expenditures, or 

any other number of mistakes or improprieties that led to misreported 

costs. It also includes restatements due to improper treatment of tax 

liabilities, income tax reserves, and other tax-related items.



Category: In-process research and development; Description: 

Restatements resulting from instances in which improper accounting 

methodologies were used to value in-process research and development at 

the time of an acquisition.



Category: Other; Description: Any restatement not covered by the listed 

categories. Cases included in this category include restatements due to 

inadequate loan-loss reserves, delinquent loans, loan write-offs, or 

improper accounting for bad loans and restatements due to fraud, or 

accounting irregularities that were left unspecified.



Category: Reclassification; Description: Restatements due to 

improperly classified accounting items. These include restatements due 

to improprieties such as debt payments being classified as 

investments.



Category: Related-party transactions; Description: Restatements due to 

inadequate disclosure or improper accounting of revenues, expenses, 

debts, or assets involving transactions or relationships with related 

parties. This category includes those involving special purpose 

entities.



Category: Restructuring, assets, or inventory; Description: 

Restatements due to asset impairment, errors relating to accounting 

treatment of investments, timing of asset write-downs, goodwill, 

restructuring activity and inventory valuation, and inventory quantity 

issues.



Category: Revenue recognition; Description: Restatements due to 

improper revenue accounting. This category includes instances in which 

revenue was improperly recognized, questionable revenues were 

recognized, or any other number of mistakes or improprieties that led 

to misreported revenue.



Category: Securities related; Description: Restatements due to improper 

accounting for derivatives, warrants, stock options and other 

convertible securities.



Note: We excluded announcements involving stock splits, changes in 

accounting principles, and other financial statement restatements that 

were not made to correct mistakes in the application of accounting 

standards.



Source: GAO.



[End of table]



Although most of the other categories account for only a small percent 

of total restatements, we found that securities-related restatements, 

which made up about 6 percent of the total, increased significantly 

during the first half of 2002. Securities-related restatements, which 

can stem from errors and misstatements involving derivatives, warrants, 

stock options, and other convertible securities, increased from 4.6 

percent of restatements in 2001 to 12.4 percent of restatements in the 

first half of 2002. Moreover, we identified more securities-related 

restatements in the first half of 2002 than for all of 2001. Enron is 

one of the most notable companies whose restatements were based on 

securities-related reasons (as well as others). Many industry experts 

have questioned how Enron accounted for certain derivative 

transactions, and some experts asserted that Enron improperly valued 

sales of certain securities products to inflate its reported 

revenues.[Footnote 31]



A Variety of Parties Can Prompt Restatements:



A number of parties, such as the restating company, an independent 

auditor, SEC, or others can prompt financial statement restatements. As 

shown in figure 4, we found that about 49 percent of the 919 announced 

restatements reported the restating company as the party responsible 

for recognizing the previous misstatements. However, external parties 

may have been involved in discovering some of these misstatements, even 

if the companies may have not made that information clear in their 

restatement announcements or SEC filings. For example, Critical Path, 

Inc. (Critical Path), a technology company, announced that it was 

launching an investigation into accounting irregularities but did not 

mention in its initial announcement that its external auditor had 

raised concerns about the company’s accounting treatment of certain 

transactions before the company announced that it had launched an 

investigation. SEC, the external auditor, or some other external party 

(for instance, the Federal Reserve or the media) was identified as 

prompting the restatement in 16 percent of the restatements we 

identified. In 35 percent of the restatements, we were not able to 

determine who prompted the restatement because the announcement or SEC 

filing did not clearly state who actually discovered the misstatement 

of the company’s prior financial results.



Figure 4: Who Prompted Restatements, 1997-June 2002:



[See PDF for image]



Source: GAO’s analysis of GAO identified initial restatement 

announcements due to accounting irregularities.



[End of figure]



Restating Publicly Traded Companies Lost Billions of Dollars in Market 

Capitalization in the Days and Months Surrounding a Restatement 

Announcement:



In the 3 trading days surrounding the initial announcement of a 

restatement, the stock prices of most of the restating publicly traded 

companies that we analyzed decreased by almost 10 percent and, in 

total, these companies lost more than $100 billion in market 

capitalization. While these losses are large in dollar terms, they are 

negligible compared with the total market capitalization of the overall 

stock market. We found that restatements involving revenue recognition 

accounted for more than half of these losses. We also found evidence 

that the stock prices of the restating companies remained depressed for 

longer periods, although other factors may have contributed to this.



On Average, Stock Prices Fell in the Days Surrounding the Initial 

Restatement Announcement:



We estimated that for the 689 cases we analyzed from January 1, 1997, 

to March 26, 2002, the stock price of a company making an initial 

restatement announcement fell by almost 10 percent (market-adjusted), 

on average, from the trading day before to the day after the 

announcement (the immediate impact).[Footnote 32] Unadjusted losses in 

the market capitalization of companies issuing initial restatement 

announcements totaled over $100 billion, ranging from about $4.6 

billion in 1997 to about $28.7 billion in 2000. As table 3 shows, even 

when the losses were adjusted for general movements in the overall 

market, restating companies lost $95.6 billion in market 

capitalization. Although we attempted to control for general market 

movements over each 3-trading day window in an effort to isolate the 

impact of the announcement, other factors may have influenced the stock 

price of a retating company during this period.:



Table 3: Summary of Immediate Market Impact on Restating Companies, 

1997-2002:



Calendar year or period: 1997; Average holding period abnormal return 

(percent): -10.6 %; Total unadjusted loss in market capitalization

(dollars in billions): $4.6; Total market-adjusted loss in market 

capitalization (dollars in billions): $3.2; Number of restatement 

announcements analyzed: 80 of 92.



Calendar year or period: 1998; Average holding period abnormal return 

(percent): -14.0; Total unadjusted loss in market capitalization

(dollars in billions): 20.6; Total market-adjusted loss in market 

capitalization (dollars in billions): 21.3; Number of restatement 

announcements analyzed: 87 of 102.



Calendar year or period: 1999; Average holding period abnormal return 

(percent): -9.6; Total unadjusted loss in market capitalization

(dollars in billions): 19.7; Total market-adjusted loss in market 

capitalization (dollars in billions): 18.4; Number of restatement 

announcements analyzed: 145 of 174.



Calendar year or period: 2000; Average holding period abnormal return 

(percent): -10.6; Total unadjusted loss in market capitalization

(dollars in billions): 28.7; Total market-adjusted loss in market 

capitalization (dollars in billions): 26.3; Number of restatement 

announcements analyzed: 152 of 201.



Calendar year or period: 2001; Average holding period abnormal return 

(percent): -5.6; Total unadjusted loss in market capitalization

(dollars in billions): 19.3; Total market-adjusted loss in market 

capitalization (dollars in billions): 20.4; Number of restatement 

announcements analyzed: 181 of 225.



Calendar year or period: 2002; Average holding period abnormal return 

(percent): -9.6; Total unadjusted loss in market capitalization

(dollars in billions): 7.4; Total market-adjusted loss in market 

capitalization (dollars in billions): 6.0; Number of restatement 

announcements analyzed: 44 of 125.



Calendar year or period: 1997-2002; Average holding period abnormal 

return (percent): -9.5; Total unadjusted loss in market capitalization

(dollars in billions): 100.2; Total market-adjusted loss in market 

capitalization (dollars in billions): 95.6; Number of restatement 

announcements analyzed: 689 of 919.



Notes: The average holding period abnormal returns were statistically 

different from zero at the 1-percent level of significance for all 

periods. We excluded 230 cases for a variety of reasons, including 

cases that involved companies that were not listed on NYSE, Nasdaq, or 

Amex; cases that involved initial restatement announcements made after 

March 26, 2002; and cases that involved missing data resulting from 

trading suspensions, delistings, bankruptcies, and mergers. Data for 

2002 are through March 27. Numbers may not add up due to rounding.



Source: GAO’s analysis of Nasdaq, NYSE TAQ, and SEC data.



[End of table]



Compared with the total market capitalization of publicly traded 

companies listed on NYSE, Nasdaq, and Amex, our estimate of the 3-day 

losses in the market capitalization of restating companies remained 

below 0.2 percent per year with no clear trend over time (table 4). Our 

finding that losses as a percentage of market capitalization appear 

relatively small is not surprising considering the short duration of 

our analysis. We chose this 3-trading day window to focus, as much as 

possible, on the restatement to the exclusion of other factors. Later 

in this report, we examine losses over a longer period as well as the 

effects of restatements on overall market confidence.



Table 4: Restating Companies’ Immediate Market Losses Compared with 

Total Stock Market Capitalization, 1997-2002:



Calendar year: 1997; Total market capitalization of listed companies

(dollars in billions): $11,600; Total unadjusted loss in market

capitalization of restating companies (dollars in billions): $4.6; 

Total unadjusted loss as a percent of total market capitalization

(percent): 0.04%.



Calendar year: 1998; Total market capitalization of listed companies

(dollars in billions): 13,600; Total unadjusted loss in market

capitalization of restating companies (dollars in billions): 20.6; 

Total unadjusted loss as a percent of total market capitalization

(percent): 0.15.



Calendar year: 1999; Total market capitalization of listed companies

(dollars in billions): 17,600; Total unadjusted loss in market

capitalization of restating companies (dollars in billions): 19.7; 

Total unadjusted loss as a percent of total market capitalization

(percent): 0.11.



Calendar year: 2000; Total market capitalization of listed companies

(dollars in billions): 16,100; Total unadjusted loss in market 

capitalization of restating companies (dollars in billions): 28.7; 

Total unadjusted loss as a percent of total market capitalization

(percent): 0.18.



Calendar year: 2001; Total market capitalization of listed companies

(dollars in billions): 14,700; Total unadjusted loss in market

capitalization of restating companies (dollars in billions): 19.3; 

Total unadjusted loss as a percent of total market capitalization

(percent): 0.13.



Calendar year: 2002; Total market capitalization of listed companies

(dollars in billions): 14,900; Total unadjusted loss in market

capitalization of restating companies (dollars in billions): 7.4; 

Total unadjusted loss as a percent of total market capitalization

(percent): 0.05.



Notes: We excluded 230 cases for a variety of reasons, including cases 

that involved companies that were not listed on NYSE, Nasdaq, or Amex; 

cases that involved initial restatement announcements made after March 

26, 2002; and cases that involved missing data resulting from trading 

suspensions, delistings, bankruptcies, and mergers. Data for 2002 are 

through March 27. The total market capitalization of the listed 

companies is calculated based on January 1998 month-end stock data for 

1997, year-end stock data for 1998 to 2001, and March month-end stock 

data for 2002.



Source: GAO’s analysis of Nasdaq, NYSE TAQ, and SEC data.



[End of table]



We also conducted a separate immediate impact analysis on the 230 

announcements that were excluded from our primary analysis due to 

missing TAQ data from January 1997 through June 2002. This analysis was 

limited to a simple assessment of the unadjusted losses in market 

capitalization due to restatement announcements. Ninety-one of these 

cases involved companies that had stock traded on the OTC bulletin 

board or Pink Sheets, and 71 involved companies that issued 

restatements after the initial cutoff date of March 26, 2002. Of the 

230 cases, we were able to obtain historical stock price information 

from Nasdaq’s Web site for 202 of these, each involving a different 

company.[Footnote 33] On average, the market capitalization of these 

companies dropped by approximately 5 percent from the trading day 

before through the trading day after the announcement. Our estimate of 

unadjusted loss in the market capitalization for these 202 companies 

issuing initial restatement announcements suggested that an additional 

$14 billion was lost in the 3 trading days around the initial 

restatement announcement from 1997 to 2002.



Restatements Involving Revenue Recognition Led to Relatively Greater 

Losses:



We found that announcements involving revenue recognition totaled over 

$56 billion, or more than half, of the $100 billion in market 

capitalization that restating companies lost in the 3 trading days 

around the initial announcement (fig. 5). Of the 689 cases analyzed, 

revenue recognition was the most frequently cited reason for restating 

(39 percent).[Footnote 34] While restatements attributed to the 

acquisition and merger category accounted for only 6 percent of the 689 

restatements analyzed, they accounted for $19 billion or almost 20 

percent of losses. However, the second most frequently cited reason for 

restating, improper or questionable accounting for costs or expenses 

(14 percent), totaled only about 4.8 percent, or about $4.8 billion, of 

total market capitalization lost.



Conversely, we found that announcements involving restructuring, asset 

impairment, and inventory issues resulted in an overall increase of 

$2.9 billion in market capitalization. This increase was largely driven 

by the positive market response to two restatements, one by MCI 

Communications Corporation in 1998 and another by Kimberly-Clark 

Corporation in 1999. Both of these restatements related to the timing 

of restructuring charges and led to increases in earnings and 

collectively resulted in a $4.7 billion increase in market value. 

However, with the exception of these two restatements, the general 

market response for restatements falling into this category was 

negative--a loss of $1.8 billion.



Figure 5: Immediate Market Impact on Market Capitalization of Restating 

Companies by Restatement Reason, January 1, 1997-March 27, 2002:



[See PDF for image]



Notes: Our database includes announced restatements that were being 

made to correct previous material misstatements of financial results. 

Therefore, our database excludes announcements involving stock splits, 

changes in accounting principles, and other financial statement 

restatements that were not made to correct mistakes in the application 

of accounting standards.



Source: GAO’s analysis of initial restatement announcements, NYSE TAQ, 

and SEC data.



[End of figure]



Restatement Announcements Appeared to Have Some Longer-Term Impact on 

the Market Capitalization of Restating Companies:



Our analysis of 575 of the 919 restatement announcements showed that 

companies announcing restatements lost billions of dollars in market 

capitalization and, on average, the stock price of a company making an 

initial restatement announcement fell by 18 percent (market-adjusted), 

from 60 trading days before through 60 trading days after the 

announcement (the intermediate impact). We found that, during this 6-

month time frame, the total market capitalization loss of restating 

companies more than doubled to almost $240 billion (table 5). On a 

market-adjusted basis, we estimated that these losses totaled almost 

$190 billion. However, it is important to note that as we considered 

longer event time frames, we increased the possibility that other 

factors and events may have impacted a restating company’s stock price. 

For example, although AOL Time Warner (AOL) lost market capitalization 

in the immediate days surrounding its 1997 restatement announcement, we 

estimated the intermediate impact on AOL to be a $24.3 billion gain due 

primarily to news of the potential acquisition of CompuServe. The 

intermediate impact analysis does not control for these types of market 

factors, and as a result, any event that occurs during this time period 

is attributed to the restatement announcement. In 1997, the AOL market 

capitalization increase was large enough to produce an overall positive 

change in our estimate of the intermediate impact on market 

capitalization for 1997, although the average holding period abnormal 

return was negative. Appendix I provides additional details and 

limitations of these measures.



Table 5: Summary of Intermediate Market Impact on Restating Companies, 

1997-2002:



Calendar year or period: 1997; Average holding period abnormal return 

(percent): -22.8%; Total unadjusted gain (loss) in market 

capitalization (dollars in billions): $27.6; Total market-adjusted gain 

(loss) in market capitalization (dollars in billions): $14.0; 

Number of restatement announcements analyzed: 72 of 92.



Calendar year or period: 1998; Average holding period abnormal return 

(percent): -44.6; Total unadjusted gain (loss) in market capitalization 

(dollars in billions): (19.1); Total market-adjusted gain (loss) in 

market capitalization (dollars in billions): (40.1); 

Number of restatement announcements analyzed: 72 of 102.



Calendar year or period: 1999; Average holding period abnormal return 

(percent): -14.7; Total unadjusted gain (loss) in market capitalization 

(dollars in billions): 5.8; Total market-adjusted gain (loss) in market 

capitalization (dollars in billions): (26.5); 

Number of restatement announcements analyzed: 130 of 174.



Calendar year or period: 2000; Average holding period abnormal return 

(percent): -19.9; Total unadjusted gain (loss) in market capitalization 

(dollars in billions): (114.9); Total market-adjusted gain (loss) in 

market capitalization (dollars in billions): (73.5); 

Number of restatement announcements analyzed: 133 of 201.



Calendar year or period: 2001; Average holding period abnormal return 

(percent): -6.2; Total unadjusted gain (loss) in market capitalization 

(dollars in billions): (138.5); Total market-adjusted gain (loss) in 

market capitalization (dollars in billions): (62.0); 

Number of restatement announcements analyzed: 168 of 225.



Calendar year or period: 2002; Average holding period abnormal return 

(percent): N/A; Total unadjusted gain (loss) in market capitalization 

(dollars in billions): N/A; Total market-adjusted gain (loss) in market 

capitalization (dollars in billions): N/A; 

Number of restatement announcements analyzed: 0 of 125.



Calendar year or period: 1997-2002; Average holding period abnormal 

return (percent): -18.2; Total unadjusted gain (loss) in market 

capitalization (dollars in billions): (239.1); 

Total market-adjusted gain (loss) in market capitalization

(dollars in billions): (188.1); Number of restatement announcements 

analyzed: 575 of 919.



Note 1: The average holding period abnormal return was statistically 

different from zero at the 1-percent level of significance for each 

period except for 2001. The average holding period abnormal return for 

2001 was statistically different from zero at the 10-percent level. We 

excluded 344 cases for a variety of reasons, including cases that 

involved companies that were not listed on NYSE, Nasdaq, or Amex; cases 

that involved initial restatement announcements made after March 26, 

2002; and cases that involved missing data resulting from trading 

suspensions, delistings, bankruptcies, and mergers. Data for 2002 are 

through June.:



Note 2: N/A means not applicable.



Source: GAO’s analysis of initial restatement announcements, NYSE TAQ, 

and SEC data.



[End of table]



As requested, we also analyzed the impact of 114 announcements that 

were part of the 689 cases included in the immediate impact but were 

excluded from the intermediate impact calculation for a number of 

reasons. Of these 114 cases, we excluded 44 cases that occurred in 2002 

because we did not have enough data to perform the 60-trading day 

calculations. Of the 70 remaining cases, we were able to obtain 

information on 60 of these, each involving a different company. In 25 

of the cases, the company filed for bankruptcy protection within a 

reasonably short period of time following the restatement announcement. 

In 17 of the cases, the company continued as an independent concern; 

and in all but 4 of these cases, the company was delisted from NYSE, 

Nasadq, or Amex for failure to meet minimum listing standards. In the 

remaining 18 cases, the company either was acquired by or merged with 

another company.



We analyzed the market capitalization impact of a restatement on the 25 

companies that filed for bankruptcy and the 17 companies that continued 

as independent concerns (42 companies in all). On average, the market 

capitalization of these companies dropped by over 80 percent in the 

months surrounding the restatement announcement. We calculated the 

market capitalization of these firms to be approximately $37.4 billion 

60 trading days prior to the restatement announcement and $9.3 billion 

1 trading day prior to the restatement announcement. Trading was 

suspended within 60 trading days following the restatement announcement 

for the stocks of companies in all but 4 of these cases, and we 

estimated that the market capitalization of these companies was $1.4 

billion when their stocks were suspended. Of the firms that continued 

as independent concerns, their market capitalization was approximately 

$0.2 billion roughly 3 months after the restatement announcement. Thus, 

an additional $37 billion may have been lost following the restatement 

announcement for these 42 companies.[Footnote 35] Enron was one of the 

companies that was included in this analysis. By our estimates, Enron 

accounted for over 80 percent of the losses.



We also conducted a separate intermediate impact analysis on the 

additional 230 announcements that were excluded from our primary 

analysis due to missing TAQ data. This analysis was again limited to a 

simple assessment of the unadjusted losses in market capitalization due 

to restatement announcements. We excluded 71 cases that occurred in 

2002 because the restatements occurred after the initial cutoff date of 

March 26, 2002, and we could not locate data for 25 other companies, 

leaving 134 cases. We estimated that the market capitalization of these 

134 companies dropped over 10 percent, on average, from 60 trading days 

before, through 60 trading days after the announcement. However, we 

calculated that the market capitalization of these firms increased by 

$2.3 billion during this 6-month time frame. This was primarily due to 

a positive gain of over:



$7 billion by At Home Corporation, which restated in 1999.[Footnote 36] 

Omitting At Home Corporation, we estimated that an additional $5.1 

billion was lost following restatement announcements not captured in 

the initial analysis.



Restatements and Accounting Issues Appear to Have Negatively Impacted 

Investor Confidence:



Not only do restatement announcements appear to affect company stock 

prices, but some evidence suggests that these announcements and the 

questions they raise about certain corporate accounting practices may 

negatively impact overall investor confidence. Investor confidence is 

difficult to quantify because it cannot be measured directly and 

because investors consider a variety of factors when making an 

investment decision. Nevertheless, we identified several survey-based 

indexes that used a variety of methods to measure investor optimism and 

empirical work by academics and financial experts. A periodic UBS/

Gallup survey-based index aimed at gauging investor confidence 

conducted since 1996, found that as of June 2002 investor confidence 

was at an all-time low due to concern over corporate accounting 

practices (even lower than the period just after September 11, 2001). 

According to another index, that asks different questions, investor 

confidence levels were largely unaffected by the September 11 terrorist 

attacks and that the current direction of investor confidence is 

unclear. However, a number of academicians found that investors 

generally believe that the growing number of restatements is 

symptomatic of a larger, more pervasive problem and that this belief 

has had a negative impact on investor confidence. Interviews with 

various experts in the field also suggest that the growing number of 

financial statement restatements has hampered overall investor 

confidence. Although a variety of factors contribute to changes in 

mutual fund flows, recent flow activity may also indicate that investor 

confidence has been negatively affected.



UBS/Gallup Index of Investor Confidence Reveals Negative Impact of 

Accounting Concerns on Investor Confidence:



The UBS/Gallup Index of Investor Optimism[Footnote 37] suggests that 

overall investor confidence has declined significantly since September 

2000 and has fallen below the prior record low of 50 set in September 

2001 (fig. 6). Between its inception in late 1996 and September 2000, 

the Index fluctuated around 150. After a dramatic decline from about 

September 2000 through February 2001 (attributed to a variety of 

causes, notably the decline in the stock market and the protracted 

litigation involving the presidential election), the Index stabilized 

somewhat around a value of 85 during the last quarter of 2001. 

Following a peak of 121 in March 2002, the Index declined 62 percent to 

an all-time low of 46 in July 2002. Overall optimism rose slightly in 

August 2002 to 52, following 3 months of steep declines.



Figure 6: UBS/Gallup Investor Optimism Index, October 1996-August 2002:



[See PDF for image]



Source: UBS/Gallup.



[End of figure]



While investors have cited a number of reasons for the decline in the 

investor optimism index, the surveys show that since February 2002 the 

leading concern has been the negative impact of questionable accounting 

practices on the market. Other reasons identified by a significant 

proportion of all the investors polled included (1) the general 

economic condition in the United States, (2) the war on terrorism, and 

(3) the Israeli-Palestinian conflict. However, these reasons 

consistently lagged behind and were ultimately surpassed by 

questionable accounting practices. By July 2002, 91 percent of all 

investors surveyed felt that accounting issues were negatively 

impacting the market, up from 79 percent in February (fig. 7). 

Likewise, in May 2002, 71 percent believed accounting problems were 

widespread, up from 62 percent in February. Moreover, 40 percent of 

those interviewed in July 2002 said that they were less likely to 

invest in equities as a result of questionable accounting practices, up 

from 34 percent in February 2002.



Although U.S. securities markets are influenced by a variety of 

factors, the results of the July 2002 survey may suggest that resolving 

corporate accounting issues could significantly improve the outlook for 

U.S. markets. For example, when investors were asked what changes would 

have an extremely large impact on improving financial market 

conditions, the most frequent response was a healthier economic 

environment (38 percent). The next three items on the list were (1) 

strict prison sentences for corporate managers who commit fraud (37 

percent), (2) new SEC regulations to address questionable accounting 

practices (34 percent), and (3) new federal guidelines for ethical 

standards among corporate managers (31 percent).



Figure 7: Effect of Accounting Concerns on Investor Confidence in the 

Stock Market, February 2002-July 2002:



[See PDF for image]



Note: Questions about the widespread nature of accounting problems and 

whether investors were less likely to invest were only asked in 

February and May.



Source: UBS/Gallup.



[End of figure]



At Least One Notable Expert Finds Stock Market Confidence Virtually 

Unaffected:



The International Center for Finance at the Yale School of Management 

calculates four indexes that are based on survey questions directed to 

both individual and institutional investors.[Footnote 38] The indexes 

are based on the following survey questions:



* One-Year Confidence Index - “How much of a change in percentage terms 

do you expect to see in the Dow Jones Industrial Average [Dow] for the 

next year?”:



* Buy on Dip Confidence Index - “If the Dow dropped 3 [percent] 

tomorrow, how would the Dow move the day after tomorrow?”:



* Crash Confidence Index - “What do you think is the probability of a 

catastrophic stock market crash in the United States in the next [6] 

months?”:



* Valuation Confidence Index - “Are stock prices in the [United States] 

too low, too high, or about right when compared with measures of true 

fundamental value?”:



The results of the surveys reveal that although investors believe the 

market is overvalued, they generally trust that market valuations will 

increase and that, if they fall, they will rise again. Although these 

confidence indexes do not directly measure the impact of earnings 

restatements on investor confidence, they suggest general confidence in 

the market. Another indication of this enduring confidence is the 

current price-to-earnings ratio, which was valued at more than the 

historical average as of June 2002.



We focused on the three indexes that most directly measure investor 

confidence. The first Yale index is the One-Year Confidence Index, 

which indicates that institutional investor confidence has increased 

steadily from November 2001 to June 2002, rising from 72 percent to 83 

percent, while individual investor confidence held steady around 89 

percent. However, this index may capture only investors’ sentiment 

about the 30 blue-chip stocks that comprise the Dow and not about the 

entire market. The results could be interpreted as reflecting only 

investors’ belief that companies comprising the Dow are relatively free 

of financial statement restatements and thus confident about only this 

subset of the market.



The second Yale index is the Buy on Dip Confidence Index, which yields 

somewhat conflicting results. The results suggest that individual 

investor confidence was at 79 percent in January 2002 and declined to 

69 percent by June 2002. However, this index finds that during the same 

period, institutional investor confidence remained steady at around 60 

percent. This implies a divergence in opinion between individual and 

institutional investors but it is unclear what this difference means 

for overall confidence in the stock market and how confidence has been 

impacted by financial statement restatements. However, these findings 

appear to suggest that developments during 2001 and 2002 had some 

effect on individual investors’ confidence but no real effect on 

institutional investors’ confidence.



The third Yale index is the Crash Confidence Index, which suggests that 

investors’ confidence has been consistently low, less than 50 percent, 

for both individual and institutional investors. However, once again 

the trend in the data suggests a divergence between institutional and 

individual investors. For example, results suggest that individual 

investors’ belief that there will be no stock market crash in the next 

6 months has gradually declined since 1989. However, this index finds 

that during this same period, results revealed no such trend for 

institutional investors, with the exception of a large drop after 

September 11. Since that date, confidence that the stock market will 

not crash has risen slightly for both institutional and individual 

investors. This increase in confidence could reflect the belief that 

the market has underperformed over the last 2 years and that investors 

do not expect prices to fall significantly from their present lows.



Other Empirical Evidence and Interviews Suggest a Negative Impact on 

Investor Confidence:



One study has attempted to quantify the loss in investor confidence 

correlated with earnings restatements, finding a statistically 

significant decline. The study measured the “earnings response 

coefficient” of individual firms before and after their 

restatements.[Footnote 39] The earnings response coefficient 

indirectly measures how responsive shareholders are to earnings 

information by relating a company’s positive earnings announcements to 

a positive effect on the company’s share price. This study found that 

prior to a restatement, a statistically significant relationship 

existed between quarterly earnings announcements and share prices. 

After the restatement, however, an earnings announcement showed no 

significant effect on share price, indicating that the market no longer 

trusted the company’s information about its earnings and demonstrating 

a loss of investor confidence.



According to several academic experts, there have been significant 

repercussions as a result of earnings restatements, including a decline 

in trust in both the accounting profession and corporate management. 

Despite the fact that U.S. financial information is viewed as more 

complete than similar information anywhere else in the world, most of 

the academicians we contacted raised concerns about the quality of 

financial information the investing public receives. One industry 

expert’s comment broadly reflects the sentiment of the group:



“Too often, restatements involve both management pressing and exceeding 

the limits of reasonable accounting interpretations of GAAP and 

apparent auditor agreement and even participation in the reporting 

choices that ultimately require restatement.”:



Many of these experts believe that the decline in equity markets and 

increased market volatility is symptomatic of increased risk and 

perceived unreliability of financial reports; that is, investor 

confidence has suffered as a result of the increase in financial 

statement restatements.



Mutual Fund Flows May Indicate that Investor Confidence Has Been 

Negatively Affected:



Although a variety of factors influence investors’ decisions to buy or 

sell mutual fund shares, mutual fund flow data may indicate that 

investor confidence has been negatively affected by recent accounting-

related irregularities. Implicit in the decision to buy a share of a 

company’s stock is the expectation of future payoffs in the form of 

dividends, share price increases, or both. Investors’ confidence in 

their ability to accurately value their equity holdings relies upon the 

accuracy of the information available. If the information provided is 

not accurate, the reported income stream generated from holding company 

shares becomes more uncertain and the stock market investment riskier. 

According to some researchers, mutual fund flows are another indictor 

of investor sentiment, because mutual funds have become an important 

alternative to direct purchases of securities. Consequently, this 

sector has been one of the biggest sources of liquidity in the stock 

market, reflecting a large number of market participants. Mutual fund 

investors demonstrate their confidence in the stock market by buying or 

selling equity mutual fund shares. Annual equity mutual fund net flows 

(sales less redemptions) declined significantly from 2000 to 2001, 

falling from $310 billion to $32 billion.[Footnote 40] Although the 

monthly mutual fund net flows fluctuated substantially between October 

2001 and March 2002, they have exhibited a clear downward trend since 

March, turning negative in June and July (fig. 8). The outflow of about 

$18 billion in June 2002 was the fourth-largest outflow ever, and the 

outflow in July 2002 was the largest outflow on record at the time of 

our review.



Figure 8: Equity Mutual Fund Net Flows, June 2001-July 2002:



[See PDF for image]



Source: Investment Company Institute.



[End of figure]



SEC Has Been Investigating an Increasing Number of Cases Involving 

Accounting-Related Issues:



As part of its mission to detect and deter fraud and abuse, SEC’s 

Division of Enforcement (Enforcement) investigates possible violations 

of securities laws, including those related to accounting issues. 

Enforcement may recommend action to the Commission when an 

investigation shows that a violation of the securities laws likely has 

occurred. However, concerns about staff constraints have raised 

questions about Enforcement’s ability to effectively fulfill its 

mission. Based on concerns about the quality of financial reporting and 

accounting abuses, SEC began to focus more attention and investigative 

activity on accounting-related violations in the late 1990s. From 

October 1998 to September 2001, almost one in five enforcement cases 

brought by SEC involved accounting-related issues. To identify the type 

of enforcement actions brought for accounting-related violations and 

the parties against whom SEC brought the actions, we analyzed 150 

Accounting and Auditing Enforcement Releases (AAER) issued from January 

2001 through February 2002.[Footnote 41]



SEC’s Enforcement Function Has Been Challenged Due to Workload and 

Staffing Issues:



Following the recently publicized accounting problems at several large 

public companies, concerns were raised about the sufficiency of SEC’s 

resources to address ongoing accounting-related issues. As we reported 

in our March 2002 report on SEC’s resources, enforcement was identified 

as one of the areas most affected by an increasing workload and limited 

staff resources.[Footnote 42] We found that SEC’s enforcement workload 

from 1991 to 2000, as measured by opened cases and the number of cases 

pending at the end of the year, had increased 65 and 77 percent, 

respectively. Conversely, staff years dedicated to investigations had 

increased only 16 percent during this same period. Because SEC is 

unable to pursue every case, SEC officials said that they must 

prioritize the cases they will pursue. The factors to be considered 

include the seriousness of the wrongdoing and the message the case 

would deliver to the industry and public. SEC’s enforcement process is 

often lengthy, with many cases taking years to close.



SEC Makes Policy Decision to Focus More Attention on Accounting-Related 

Issues in the Late 1990s:



According to SEC documents, SEC views the integrity of financial 

reporting as a “fundamental building block” of the full and fair 

disclosure that gives investors confidence in U.S. markets. Moreover, 

SEC considers pursuit of accounting fraud one of its top enforcement 

priorities. Since the late 1990s, SEC has focused more attention on 

accounting-related issues. In a 1998 speech, former SEC Chairman Arthur 

Levitt raised concerns about earnings management and other accounting 

and disclosure issues.[Footnote 43] He stated that:



“The motivation to meet Wall Street earnings expectations may be 

overriding common sense business practices. Too many corporate 

managers, auditors, and analysts are participants in a game of nods and 

winks. In the zeal to satisfy consensus earnings estimates and project 

a smooth earnings path, wishful thinking may be winning the day over 

faithful representation. As a result, I fear that we are witnessing an 

erosion in the quality of earnings, and therefore, the quality of 

financial reporting. Managing may be giving way to manipulation; 

integrity may be losing out to illusion.”:



In response to these concerns, he articulated a private-public sector 

action plan that included specific steps. Two of the steps directly 

required SEC action. One directed SEC staff “to immediately consider 

interpretive accounting guidance on the do’s and don’ts of revenue 

recognition.” Subsequently, SEC’s Staff Accounting Bulletin: No. 101 - 

Revenue Recognition in Financial Statements (SAB 101) was issued in 

December 1999. According to an SEC official, about half of all SEC’s 

accounting-related enforcement cases involved revenue recognition 

issues. The other step included SEC staff formally targeting reviews of 

“public companies that announce restructuring liability reserves, major 

write-offs, or other practices that appear to manage earnings. 

Likewise, our enforcement team will continue to root out and 

aggressively act on abuses of the financial reporting process.” In 

September 1999, SEC announced its first coordinated “sweep” of 

financial reporting violations, which resulted in 30 enforcement 

actions against 68 individuals and companies for engaging in fraud and 

related misconduct in accounting, reporting, and the disclosure of 

financial results by 15 public companies. Individuals cited included 

chief executive officers (CEO) from 11 of the 15 companies.



SEC also leveraged the findings of a March 1999 report by the Committee 

of Sponsoring Organizations of the Treadway Commission entitled 

Fraudulent Financial Reporting, 1987 - 1997: An Analysis of U.S. Public 

Companies, which provided an extensive analysis of financial statement 

fraud occurrences from 1987 to 1997. The report, based on SEC’s AAERs, 

found that over half of financial reporting frauds in the study 

involved overstating revenue and included information on common 

characteristics of the companies committing the fraud, such as top 

management involvement and infrequent audit committee meetings. In May 

2000, to further supplement SEC’s financial fraud enforcement efforts, 

SEC created the Financial Fraud Task Force within Enforcement.[Footnote 

44] SEC has reported that the task force continues to focus on the 

professionals involved in these cases, especially the auditors, who 

“stand as the watchdogs of the reporting process.”:



SEC’s Enforcement of Accounting-Related Violations Has Increased:



Enforcement investigates possible violations of securities laws, 

including those related to accounting issues, which have increased from 

about 15 percent in fiscal 1996 to about 20 percent of SEC’s total 

enforcement activity in fiscal year 2001. As figure 9 illustrates, if 

the evidence gathered merits further inquiry, Enforcement will prompt 

an informal investigation or request that SEC issue a formal order of 

investigation. Investigations can lead to SEC-prompted administrative 

or federal civil court actions. Depending on the type of proceeding, 

SEC can seek sanctions that include injunctions, civil money penalties, 

disgorgement,[Footnote 45] cease-and-desist orders, suspensions of 

registration, bars from appearing before the Commission, and officer 

and director bars. After an investigation is completed SEC may 

institute either type of proceeding against a person or entity that it 

believes has violated federal securities laws.[Footnote 46] Because SEC 

has only civil enforcement authority, it may also refer appropriate 

cases to the Department of Justice for criminal investigation and 

prosecution. According to SEC’s annual report, most enforcement actions 

are settled, with respondents generally consenting to the entry of 

civil judicial or administrative orders without admitting or denying 

the allegations against them.



In March 2002, SEC announced plans to implement “real-time” enforcement 

in an effort to take more immediate action to better protect investors. 

Real-time enforcement is intended to protect investors by (1) obtaining 

emergency relief in federal court to stop illegal conduct 

expeditiously; (2) filing enforcement actions more quickly, thereby 

compelling disclosure of questionable conduct so that the public can 

make informed investment decisions; and (3) deterring future misconduct 

through imposing swift and stiff sanctions on those who commit 

egregious frauds, repeatedly abuse investor trust, or attempt to impede 

SEC’s investigation processes. According to Enforcement officials, 

real-time enforcement was used recently in its dealings with Adelphia 

Communications Corporation (Adelphia) and WorldCom, which resulted in 

the immediate agreement to restate their financial reports. However, 

according to SEC officials, insufficient resources may inhibit the 

effectiveness of this initiative, which depends upon prompt action by 

Enforcement staff.



Figure 9: SEC Enforcement Process:



[See PDF for image]



Source: GAO’s analysis of SEC’s enforcement process.



[End of figure]



We found that from fiscal year 1999 through fiscal year 2001, almost 20 

percent of all enforcement cases prompted were for accounting-related 

violations, up from about 8 percent in 1990 (fig. 10). From 1999 to 

2001, SEC has brought an average of about 500 total enforcement actions 

each year. Of these actions, an average of about 89 were accounting-

related. To determine the most frequent types of accounting-related 

violations found in recent SEC enforcement cases, we examined 150 AAERs 

issued from January 1, 2001, to February 28, 2002.[Footnote 47] Of the 

150 AAERs we reviewed, 87 were administrative, 62 were civil 

litigation, and one was a report of investigation. The most frequent 

types of accounting-related violations identified included fraud, 

filing misleading information with SEC, and failing to maintain proper 

books and records. Appendix XXII describes some of the most frequently 

cited violations in greater detail.



Figure 10: Number of AAERs and Total SEC Enforcement Actions Initiated, 

1990-2001:



[See PDF for image]



Notes: Data are for fiscal years. SEC counted some AAERs more than once 

in total enforcement actions initiated.



Source: GAO’s analysis of SEC annual reports.



[End of figure]



About 75 percent of the 150 AAERs we reviewed were brought against 

public companies or their directors, officers, employees, and other 

parties.[Footnote 48] The remaining 25 percent involved actions brought 

against accounting firms and CPAs. SEC officials said that enforcement 

actions for cases of accounting-related violations are usually brought 

against the most senior responsible corporate officials. They said that 

they prefer to charge those who had first-hand knowledge of an 

accounting-related violation. In addition, if an individual knows about 

an accounting-related violation and does not take corrective action, 

that person’s failure to act may, under some circumstances, be enough 

to impute liability. Officials also said they usually charge 

recordkeeping violations directly against the violating public company 

because the company is responsible for keeping records. SEC may also 

charge the company with an accounting-related violation when the 

evidence against a number of individuals is sufficient to presume the 

behavior is corporate policy at the company. According to one SEC 

official, historically, SEC has been reluctant to seek civil monetary 

penalties against companies in financial fraud cases because their 

costs would be passed along to shareholders who had already suffered as 

a result of the violations.



Congress, market participants, and others have questioned the lack of 

severity of many of the sanctions given the level of investor harm. 

According to one SEC official, because monetary penalties are often 

paid by officer and director insurance policies or are considered 

insignificant in relation to the violation, Enforcement should pursue 

more officer and director bars. However, this official acknowledges 

that SEC sought more officer and director bars in fiscal year 2001 than 

in the previous year and the test for imposing officer and director 

bars is restrictive.[Footnote 49] We found that of the 150 AAERs we 

reviewed, SEC charged over 30 chief financial officers (CFO) and over 

30 CEOs with accounting-related violations. SEC imposed 23 injunctions; 

civil monetary penalties totaling over $1.2 million (ranging from 

$10,000 to $162,000) against 19 individuals; over $2.5 million in 

disgorgement (ranging from almost $18,000 to over $772, 000) against 10 

individuals; 6 cease and desist orders; and 9 officer and director 

bars.[Footnote 50] See appendixes V through XX for a summary of the 

actions taken by SEC in the 16 cases we analyzed.



Enforcement may also bring an enforcement action against other 

individuals such as officers and principals who are not part of top 

management (other participants and responsible parties). In the AAERs 

we reviewed, SEC charged such individuals[Footnote 51] with accounting-

related violations that resulted in 31 injunctions, over $1.8 million 

in civil monetary penalties (ranging from over $8,000 to $350,000) 

against 29 individuals; over $1 million in disgorgement (ranging from 

$10,000 to over $521,000) against 13 individuals; 21 cease and desist 

orders; and 9 officer and director bars. For example, SEC and in some 

cases the Department of Justice have filed suit against several former 

senior officers at public companies, including Waste Management Inc. 

(Waste Management), Rite Aid Corporation (Rite Aid), Critical Path, and 

Adelphia.[Footnote 52] These former executives have been charged with 

securities law violations such as fraud, fraudulent reporting, record-

keeping violations, and insider trading. Further, they have been 

accused of forging contracts, purchase orders, and other documents, 

lying to auditors, and entering into undisclosed agreements to falsely 

boost a company’s revenue.



Enforcement may also bring actions against accounting firms when the 

facts indicate that the controlling principals of an accounting firm 

committed an accounting or other violation. If the accounting firm is 

one of the U.S. “Big Five,” the accounting issues must rise to the 

“national level” before SEC will take action against the entire 

firm.[Footnote 53] SEC officials characterized a national-level issue 

as one in which one or more principals at the national office of the 

firm are culpable in connection with the wrongful conduct, regardless 

of whether they are on the engagement team. Enforcement also 

investigates improper professional conduct by accountants and other 

professionals who appear before SEC, and the agency may pursue 

administrative disciplinary proceedings against these professionals 

under SEC’s Rules of Practice 102(e).[Footnote 54] If SEC finds that 

securities laws have been violated or improper professional conduct has 

occurred, it can prohibit professionals from appearing before SEC 

temporarily or permanently. Enforcement officials told us that SEC 

typically pursues cases in which a licensed accountant or auditor 

violates the securities laws or demonstrates improper professional 

conduct under Rule 102(e). A licensed accountant engages in improper 

professional conduct if he or she intentionally or knowingly violates 

an applicable professional standard or engages in either of the two 

types of negligent conduct defined under the rule.[Footnote 55] As 

table 6 shows, from January 2001 through February 2002, SEC has taken 

action against 39 CPAs, 1 accountant, and 9 accounting firms. In 

addition, SEC has imposed 14 injunctions, over $7.7 million in civil 

monetary penalties (ranging from $30,000 to $7 million) against 8 

individuals and firms; over $83,000 in disgorgements (ranging from over 

$16,000 to almost $42,000) against 2 individuals and 1 firm; and issued 

33 cease and desist orders.



Table 6: Rule 102(e) and Cease and Desist Actions Against CPAs and 

Accounting Firms, January 2001-February 2002:



Suspended or denied the privilege of appearing or practicing 

before the SEC for:



Action: 1 year; 4; 0; Number of (non-Big Five) accounting firms: 0; 

Number of Big Five accounting firms: 0.



Action: 2 years; 3; 0; Number of (non-Big Five) accounting firms: 0; 

Number of Big Five accounting firms: 0.



Action: 3 years; 16[A]; 0; Number of (non-Big Five) accounting firms: 

2; Number of Big Five accounting firms: 0.



Action: 5 years; 2; 0; Number of (non-Big Five) accounting firms: 0; 

Number of Big Five accounting firms: 0.



Action: 10 years; 1; 0; Number of (non-Big Five) accounting firms: 0; 

Number of Big Five accounting firms: 0.



Action: Unspecified; 2; 1; Number of (non-Big Five) accounting firms: 

1; Number of Big Five accounting firms: 0.



Action: Permanent; 4; 0; Number of (non-Big Five) accounting firms: 1; 

Number of Big Five accounting firms: 0.



Action: Cease and desist; 6; 0; Number of (non-Big Five) accounting 

firms: 1; Number of Big Five accounting firms: 1.



Action: Censure; 1; 0; Number of (non-Big Five) accounting firms: 0; 

Number of Big Five accounting firms: 3.



Action: Total actions; 39; 1; Number of (non-Big Five) accounting 

firms: 5; Number of Big Five accounting firms: 4.



[A] Of the 16, 14 were currently CPAs and 2 were former CPAs.



Note: In two cases, CPAs received suspensions for an unspecified 

period, and then received permanent suspensions. CPAs and accounting 

firms who receive suspensions may apply for reinstatement of privileges 

after the stated time has elapsed.



Source: GAO’s analysis of SEC AAERs issued from January 2001 through 

February 2002.



[End of table]



SEC may also charge outside auditors with fraud in certain cases. For 

example:



* If an outside auditor finds an accounting violation or 

misrepresentation while conducting an audit but does not take action to 

correct the matter, the auditor has failed to comply with GAAS, and 

issues a materially misleading report.



* If a fraud occurred that an outside auditor found out about and the 

auditor failed to take appropriate action, the auditor has failed to 

comply with GAAS and Section 10A of the Exchange Act, thus contributing 

to a material misstatement (a GAAP violation).[Footnote 56]



* If there is evidence to prove that an outside auditor also functioned 

as an adviser with regard to financial reporting that violates SEC 

reporting requirements, the auditor has violated GAAS independence 

rules.



SEC has brought a number of recent actions against accounting firms for 

accounting-related violations. For example, in 2001, SEC obtained the 

first antifraud injunction in more than 20 years against one of the 

“Big Five” accounting firms. While neither admitting nor denying the 

charges, Arthur Andersen agreed to pay $7 million to settle charges 

that it allegedly “knowingly or recklessly issued materially false and 

misleading audit reports on Waste Management’s financial statements.” 

SEC found that the Waste Management financial statements that Arthur 

Andersen audited from 1992 to 1996 had overstated pretax income by more 

than $1 billion. In another case, SEC brought a fraud action against an 

Arthur Andersen partner for authorizing unqualified audit opinions on 

Sunbeam Corporation’s 1996 and 1997 financial statements. In January 

2002, SEC censured KPMG LLP for engaging in improper conduct because it 

served as an independent accounting firm for an audit client while 

making substantial investments in the company. Most recently, while 

neither admitting or denying the charges, in July 2002 

PricewaterhouseCoopers LLP settled SEC charges that it violated auditor 

independence rules. Although SEC retains its current authority under 

Sarbanes-Oxley for enforcing securities laws, this is an area that is 

likely to evolve as the new Board begins to carry out its new duties to 

sanction accounting firms and accountants that violate accounting and 

auditing standards.



The Growing Number of Accounting Problems in the Corporate Financial 

Reporting System Have Spurred Reforms:



The growing number of accounting problems, particularly among large 

public companies, illustrates weaknesses in the current corporate 

governance and financial reporting system at virtually every level. In 

a number of the restating companies we identified, corporate 

management, boards of directors, and auditors failed in their roles, as 

have the securities analysts and credit rating agencies that did not 

identify problems before investors and creditors lost billions of 

dollars. As we have previously reported and testified, current 

corporate governance and accounting oversight structures have 

limitations and need to be improved.[Footnote 57] In an effort to 

restore investor confidence, Congress passed and the President signed 

legislation that requires major changes in the regulation of the 

accounting profession and corporate governance. The Sarbanes-Oxley Act 

focuses on many of the needed changes, including increasing corporate 

executive accountability, creating a new auditor oversight body, 

increasing SEC’s resources, and addressing stock analysts’ conflicts of 

interest. Likewise, SEC and others have also taken actions or proposed 

action to address some of these issues. Although the legislation 

authorized additional funding for SEC, it continues to face challenges 

in addressing its traditional and new more expansive roles.



Corporate Governance, Auditing Oversight Systems, and Financial 

Reporting All Have Come Under Scrutiny:



As the number of financial statement restatements resulting from 

accounting irregularities has increased, the existing fragmented 

corporate governance and accounting oversight structures have been 

called into question (fig. 11). First, questions have been raised about 

the adequacy of the current system of corporate governance (including 

corporate management, boards of directors, audit committees, and 

auditors) and its ability to protect investors and ensure the integrity 

of public disclosures, as evidenced by recent accounting issues and 

corporate failures. Second, the effectiveness of independent auditors, 

who are supposed to provide an additional level of verification for the 

financial information disclosed to the public, has also been 

scrutinized due to failures to perform impartial and unbiased audits to 

ensure that financial data are fairly represented in a number of cases. 

Third, the sudden unexpected collapse of large public companies like 

Enron and WorldCom has raised questions about the role played by market 

participants such as securities exchanges, securities analysts, and 

credit rating agencies.



Figure 11: Existing System of Corporate Governance and Accounting 

Oversight Structures:



[See PDF for image]



Notes: Existing structure, prior to the implementation of Sarbanes-

Oxley Act of 2002. Also, the Public Oversight Board (POB) dissolved 

itself, effective May 1, 2002.



Source: GAO analysis.



[End of figure]



Weaknesses in Corporate Governance and Financial Reporting Have 

Resulted in Problems at Several Large Companies:



Executives and boards of public corporations have an important, 

difficult, and challenging responsibility to protect the interests of 

shareholders, because corporations must address issues such as 

globalization and rapidly evolving technologies and at the same time 

maintain or raise market values by meeting quarterly earnings 

projections. These pressures, combined with executive compensation 

arrangements, often translate into a focus on short-term business 

results. This situation can create perverse incentives to “manage” 

earnings to report favorable financial results, and to disguise risks, 

uncertainties, and commitments by failing to provide transparency in 

financial reporting. In certain cases, audit committees have not 

effectively helped to protect shareholder interests and at times, 

failed to provide sound leadership and oversight of the financial 

reporting process.



Likewise, as we reported in 1996, the financial reporting model, also 

critical in promoting an effective allocation of capital among 

companies, does not fully meet users’ needs for transparency.[Footnote 

58] The existing reporting model is not well suited to identifying and 

reporting on key value and risk elements inherent in our twenty-first 

century knowledge-based economy. We found that despite the continuing 

efforts of the Financial Accounting Standards Board (FASB) and SEC to 

enhance financial reporting, changes in the business environment--such 

as the growth in information technology, new types of relationships 

between companies, and the increasing use of complex business 

transactions and financial instruments--constantly threaten the 

relevance of financial statements and pose a formidable challenge for 

standard setters. A basic limitation of the model is that financial 

statements present the business entity’s financial position and results 

of its operations largely on the basis of historical costs, which do 

not fully meet the broad range of user needs for financial 

information.[Footnote 59] Enron’s failure and the inquiries that have 

followed again have raised many questions about the adequacy of the 

current financial reporting model, such as the need for additional 

transparency, clarity, more timely information, and risk-oriented 

financial reporting.



In addition, as we reported earlier this year, boards of directors and 

their audit committees are a critical link to fair and reliable 

financial reporting.[Footnote 60] However, recent actions or inaction 

by boards of directors (especially audit committees) of several public 

companies have raised questions about how well this system of oversight 

functions. For example, the Report of Investigation by the Special 

Investigation Committee of the Enron Board of Directors (known as the 

Powers Report) identified several failures of the board in overseeing 

Enron’s relationships with several special purpose entities.[Footnote 

61] The report found that while Enron’s board put certain controls in 

place, many of the controls were not adequate nor were they properly 

implemented. Moreover, the report also found that while the board did 

not receive certain information, it also failed to appreciate important 

information that was brought to its attention. Finally, the report 

found that the audit committee had a responsibility to review related-

party transactions but performed only a cursory review. More generally, 

Congress, experts, and others have raised questions about the 

independence of corporate boards and the effectiveness of the 

independent director function in protecting shareholders.



Allegations of Accounting Fraud Raise Questions about the Quality of 

Audits:



Auditors are responsible for planning and performing audits to obtain 

reasonable, but not absolute, assurance that financial statements are 

free from direct and material misstatement, whether caused by error or 

fraud. However, Congress and others have questioned the effectiveness 

of the voluntary, self-regulatory system maintained through the 

American Institute of Certified Public Accountants (AICPA) because it 

lacks a meaningful oversight structure or substantive 

penalties.[Footnote 62] Likewise, some critics of the accounting 

profession’s peer review system, which was established to monitor 

member public accounting firms for compliance with standards, viewed 

the system as largely ineffective (fig. 11). Although SEC has the 

statutory authority to establish accounting standards and issues 

interpretative guidance and staff accounting bulletins on accounting 

and auditing matters, SEC has delegated much of its responsibility for 

setting standards for financial reporting and independent audits to the 

private sector. It has accepted accounting standards (GAAP) established 

by FASB as the primary standards for preparation of financial 

statements. Similarly, SEC has accepted the auditing standards, GAAS, 

promulgated by the Auditing Standards Board (ASB) as the standards for 

independent audits.



As stated over the years by many who have studied the accounting 

profession, no major aspect of the independent auditor’s role has 

caused more difficulty than the auditor’s responsibility for detecting 

fraud. As we testified earlier this year, in August 2000, the Panel on 

Audit Effectiveness concluded that the auditing profession needed to 

address vigorously the issue of fraudulent financial reporting, 

including fraud in the form of improper earnings management.[Footnote 

63] The report expressed concern that auditors may not be requiring 

enough evidence--that is, they have reduced the scope of their audits 

and the level of testing below what is needed to reasonably ensure the 

reliability of the financial information upon which they report. Some 

academics have questioned the profession’s movement toward audits that 

focus on business processes and the information systems used to 

generate financial information. Likewise, others question the AICPA’s 

proposed audit processes, which make many of the audit steps aimed at 

detecting a material misstatement caused by fraud optional instead of 

mandatory.



The increase in financial statement restatements involving accounting 

irregularities has caused questions about the independence and quality 

of audits being conducted by the independent auditors to 

resurface.[Footnote 64] As we testified, the current fragmented 

corporate governance and oversight structure and lack of a strong self-

disciplinary mechanism as a contributing factor. Likewise, since the 

mid-1970s, many observers of the auditing profession have expressed 

concerns about expanding the scope of professional services provided by 

the public accounting profession. One common concern is that auditors’ 

fees for consulting services, which are a substantial part of the total 

fees, can create actual or perceived conflicts that threaten auditors’ 

independence. The independence of public accountants--both in fact and 

in appearance--is crucial to the credibility of financial reporting 
and, 

in turn, the capital formation process.[Footnote 65] While this issue 

has been studied and debated for years, the Enron failure has brought 

the issue to the forefront once again because of the close relationship 

between Arthur Andersen and Enron. As mentioned previously, two recent 

cases, although not related to restatements, addressed this growing 

concern. First, SEC censured KPMG LLP in January 2002 for engaging in 

improper professional conduct because it served as an independent 

accounting firm for an audit client while making substantial 
investments 

in money market portfolios operated by the client.[Footnote 66] Second, 

in July 2002, while neither admitting nor denying the charges, 

PricewaterhouseCoopers LLP settled SEC charges that it violated auditor 

independence rules.



Recent Accounting Cases Have Raised Questions About Other Players as 

Well:



Stock exchanges or markets, credit rating agencies, and securities 

analysts also have roles in the corporate governance or corporate 

financial reporting process.[Footnote 67] Listing standards provide 

investors with some degree of assurance that the public companies 

listed on national stock exchanges and markets generally meet certain 

minimum standards of operation. Listing standards address several 

quantitative requirements such as operating history, income, and share 

price. They also include specific guidelines on corporate governance. 

Although public companies that fail to meet listing standards can be 

delisted, not all companies that fail to comply with the guidelines are 

delisted. For example, we reported in our 2001 report on Amex listing 

standards, in the first 8 months of 2000, one-third of Amex’s new 

listings did not meet the exchange’s listing standards.[Footnote 68]



Recent questions about the quality of financial disclosure have 

resulted in criticism of the role played by credit rating agencies and 

securities analysts in promoting investment in many now-bankrupt 

companies or failing to downgrade ratings before problems occurred, 

such as at Enron and WorldCom. Credit rating agencies have been 

criticized as reactive and unable to identify potential problems. 

Likewise, one of the primary flaws cited in the existing analyst 

structure is the potential for conflicts of interest. For example, 

providing investment-banking services, such as underwriting an IPO or 

advising on a merger or acquisition, can be a lucrative source of 

revenue for an analyst’s firm. As a result, analysts may face pressure 

not to say or write things that could jeopardize existing or potential 

client relationships for their investment banking colleagues.



Moreover, brokerage firms’ compensation arrangements can put pressure 

on analysts to issue positive research reports and recommendations. 

Many analysts are paid at least partly and indirectly on the basis of 

their firms’ underwriting profits. Therefore, they may be reluctant to 

make recommendations that could reduce such profits and, hence, their 

own compensation. Recently securities analysts have been investigated 

for recommending stocks of companies to help investment-banking 

colleagues win lucrative underwriting contracts, even though e-mail 

messages from analysts indicated that privately the analysts did not 

support their public ratings. Most notably, the New York State Attorney 

General investigated Merrill Lynch & Company, Inc.’s research 

practices, which resulted in the firm paying a $100 million fine in May 

2002. In addition, other regulators and prosecutors launched inquiries 

into analyst research. In September 2002, NASD fined Salomon Smith 

Barney (Salomon) $5 million for issuing materially misleading research 

in 2001 on Winstar Communications, Inc. (Winstar).[Footnote 69] 

Separately, NASD announced that it filed a complaint against the former 

managing director of Salomon’s Equity Research Department and a Salomon 

vice president. NASD alleged that the two worked closely with Winstar’s 

management and consulted management prior to issuing research reports 

that reportedly reflected their independent judgment and analysis. NASD 

also found that Salomon’s reports failed to adequately disclose the 

risks of investing in Winstar, including important risks relating to 

funding and bankruptcy. The complaint also charged that while publicly 

recommending Winstar to investors, they expressed contrary views in 

private.



Recent Legislation, Other Actions, and Ongoing Initiatives Address 

Major Aspects of Oversight:



To address many of the limitations of and lapses in the existing 

structure, Congress, SEC, and others have taken a variety of actions. 

The Sarbanes-Oxley Act was enacted on July 30, 2002, to overhaul the 

existing corporate governance and accounting oversight structure by 

increasing corporate executive accountability, creating a new auditor 

oversight body, significantly increasing SEC’s budget, and addressing 

other issues such as securities analysts’ conflicts of interest. SEC 

has also taken a number of steps aimed at strengthening its review 

function, corporate accountability, and enforcement program. Likewise, 

the SROs have strengthened rules that address certain conflict-of-

interest issues and have proposed listing standards that address 

corporate governance.



New Law Addresses Regulation of Accounting and Corporate Governance:



The Sarbanes-Oxley Act addresses many of the concerns about corporate 

reporting by enhancing the oversight of financial accounting. The act 

creates a new oversight body, the Public Company Accounting Oversight 

Board, to oversee audits of public companies. The act requires that any 

public accounting firm that performs any audit report for any publicly 

held company register with the Board. To ensure the independence of 

this new Board, it will be structured as a nonprofit corporation funded 

by registration and annual fees from registered public accounting firms 

and support fees assessed to issuers. A majority of its members will be 

nonaccountants. Unlike the previous oversight structure (that is, the 

defunct Public Oversight Board), this new board will have sweeping 

powers to inspect accounting firms, set rules and standards for 

auditing, and impose meaningful sanctions on violators. Furthermore, 

the act addresses auditor independence issues, among other things, by 

prohibiting auditors from providing certain nonaudit services to their 

audit clients and strengthening the oversight role of the board of 

directors. To increase corporate accountability, corporate boards of 

directors’ audit committee members must be “independent” and are 

responsible for selecting and overseeing independent auditors. In 

addition, pursuant to SEC rules required by the act, top corporate 

officials will have to personally attest to the accuracy of their 

firm’s accounting (and can face civil and criminal penalties if the 

certifications are false). The act also addresses numerous other issues 

aimed at strengthening investor confidence, including requiring that 

the SROs and SEC implement rules to address analysts’ conflicts of 

interest, increasing criminal sanctions, and requiring that SEC issue 

rules that address standards of professional conduct for attorneys. 

(See app. XXIII, for a detailed side-by-side comparison of the 

Sarbanes-Oxley Act and the existing governance and accounting oversight 

structure.):



SEC and Others Have Taken Steps to Address Concerns about the Existing 

Oversight Structure:



Because staffing levels were expected to remain flat while filings 

increased in number and complexity, in 2001 SEC began reconsidering how 

it approaches selecting filings for review and how to review those 

filings. As part of this effort, SEC began reviewing its existing 

screening criteria to make better use of its resources and target the 

areas of highest risk. The plan includes limiting reviews to specific 

disclosure issues or areas of material importance and assigning reviews 

to experienced staff. Following the sudden collapse of Enron, in late 

December 2001, SEC announced that CorpFin would review the annual 

reports filed by all Fortune 500 companies in 2002 as part of its 

process of reviewing disclosures--financial and nonfinancial--by 

public companies. According to SEC, CorpFin is to focus on disclosures 

that appear to be critical to an understanding of each company’s 

financial position and results but that also appear to conflict 

significantly with GAAP or SEC rules and guidance or to be materially 

deficient in explanation or clarity.



According a CorpFin official, the division staff are looking at 

qualitative disclosure as a general matter and, in light of recent 

events, putting a strong emphasis on companies’ financial statements 

and the “management discussion and analysis” portion of annual reports. 

He added that in an initial review of the Fortune 100 companies, SEC 

sent a “small number” of letters to issuers, expressing concerns about 

their reports. The subsequent separate review of the Fortune 500 

companies identified more widespread problems. In June 2002, CorpFin 

announced that it had completed screening the annual reports of most of 

the Fortune 500 companies and had selected a “very significant number” 

for a more detailed review. Moreover, staff had issued letters to 

certain companies and had started to receive responses. According to a 

CorpFin official, as of June 17, 2002, the staff had not referred any 

matter arising from the review to Enforcement for further inquiry that 

was not already the subject of Enforcement interest or 

activity.[Footnote 70]



On June 27, 2002, in light of reports of accounting irregularities at 

publicly traded companies, including some large and seemingly well-

regarded companies, SEC announced that it had initiated an 

investigation to obtain information about conditions, practices, and 

other matters relating to the financial statements and accounting 

practices of some large publicly traded companies. The purpose of the 

Commission’s investigation is to provide greater assurance to SEC and 

investors that “persons have not violated, or are not currently 

violating, the provisions of the federal securities laws governing 

corporate issuers’ financial reporting and accounting practices.” As 

part of this investigation, the Commission required written statements, 

under oath, from senior officers of 947 publicly traded companies 

(which had over $1.2 billion in revenue in their last fiscal year). The 

order required that the principal executive officer and principal 

financial officer of each company shall:



“either (a) file a statement in writing, under oath, in the form of the 

“Statement Under Oath of Principal Executive Officer and Principal 

Financial Officer Regarding Facts and Circumstances Relating to 

Exchange Act Filings,” or (b) file a statement in writing, under oath, 

describing the facts and circumstances that would make such a statement 

incorrect. In either case, such statement shall further declare in 

writing, under oath, whether or not the contents of the statement have 

been reviewed with the company’s audit committee, or in the absence of 

an audit committee, the independent members of the company’s board of 

directors.”



As of September 20, 2002, SEC’s Web site posted that 841 companies had 

filed certifications, 13 companies indicated that their officers could 

not file such an oath, and the remaining oaths are due between 

September 2002 and December 2002, depending on when the company’s 

fiscal year ends.[Footnote 71]



On May 10, 2002, SEC approved NYSE and NASD rules that address issues 

involving analysts’ conflicts of interest (table 7).[Footnote 72] 

However, these rules only enhance the scope of the SROs’ authority over 

analysts employed by their members; due to jurisdictional limitations, 

the rules do not apply to analysts employed at credit rating agencies 

or analysts who are not employed by member broker-dealers. SEC 

announced in July 2002 that it also plans to propose rules to address 

conflicts of interest among securities analysts.



Table 7: NYSE Rules 472 and 351 and NASD Rule 2711 Changes Affecting 

Securities Analysts:



Activity: Limitations on Relationships and Communications; Rule change: 

* research analysts cannot be supervised or controlled by the 

investment banking department; * investment banking personnel are 

prohibited from reviewing or approving analyst research reports prior 

to publication except to verify factual accuracy and detect potential 

conflicts of interest; * prepublication communications between 

investment banking personnel and research department personnel must be 

conducted through or monitored by a legal or compliance official; * 

analysts are prohibited from sharing research reports with subject 

companies prior to publication except for verification of factual 

accuracy, provided that drafts do not contain the research summary, 

research rating, or the price target, and that legal or compliance 

officials are involved.



Activity: Limitations and Disclosures Regarding Analyst and Firm 

Compensation; Rule change: * securities firms are barred from tying an 

analyst’s compensation to specific investment banking transactions; * 

if the principally responsible analyst’s compensation is based on the 

firm’s general investment banking revenues, that fact must be disclosed 

in the firm’s research reports; * a securities firm must disclose in a 

research report if, in the past 12 months, it managed or comanaged a 

public offering of equity securities for the subject company or 

received any compensation for investment banking services from the 

company and if, in the next 3 months, it expects to receive or intends 

to seek compensation for investment banking services from the subject 

company.



Activity: Promises of Favorable Research and Quiet Period; Rule change: 

* securities firms are prohibited from offering favorable research, a 

specific rating, or a specific price target and from threatening to 

change research, a rating, or a specific price target to induce 

investment banking business; * “quiet periods” - with certain 

exceptions and conditions, firms that have acted as a manager or 

comanager of a subject company’s securities offering are barred from 

issuing a report on the company within 40 days after an initial public 

offering or within 10 days after a secondary offering.



Activity: Restrictions on Personal Trading by Analysts; Rule change: * 

analysts and members of their households are barred from investing in a 

company’s securities prior to its initial public offering if the 

company is principally engaged in the business sector that the analyst 

covers; * “blackout periods” - generally prohibits analysts and members 

of their households from trading securities of the companies they 

follow for 30 days before and 5 days after they issue a research report 

about the company or a change in a rating or price target of the 

company’s securities; * analysts are prohibited from trading securities 

and related derivatives in a manner inconsistent with the analyst’s 

most recent recommendations.



Activity: Analyst and Firm Disclosures Regarding Ownership of 

Securities; Rule change: * analysts are required to disclose in public 

appearances, and a firm must disclose in research reports, if the 

analyst or a member of his or her household has a financial interest in 

the securities of a recommended company and the nature of the financial 

interest; * analysts are required to disclose in public appearances, 

and a firm must disclose in research reports, if the firm owns 1 

percent or more of any equity class of a recommended company as of the 

previous month end; * analysts and firms must similarly disclose (1) if 

the analyst or a member of the analyst’s household serves as an 

officer, director, or advisory board member of the subject company and 

must disclose (2) any other material conflicts of interest the analyst 

knows or has reason to know about; * analysts must disclose in public 

appearances if the analyst knows or has reason to know that the subject 

company is a client of the firm or its affiliates.



Activity: Disclosures in Research Reports Regarding the Firm’s Ratings 

and Other Matters; Rule change: * firms must define in research reports 

the meaning of all ratings used in the ratings system and the 

definition of each rating must be consistent with its plain meaning; * 

firms are required to provide in research reports information about the 

distribution of the firm’s ratings, including the percentage of all 

securities rated by the firm to which the firm would assign a “buy,” 

“hold/neutral,” or “sell” rating, and the percentage of companies 

within each category for whom the firm provided investment banking 

services within the previous 12 months; * for a securities firm that 

has rated for at least 1 year, firms are required to provide in 

research reports a graph or chart that plots historical price movements 

of the security and indicate those points at which the firm assigned or 

changed ratings and price targets for the company; * firms must 

disclose in research reports (1) the valuation methods used to 

determine a price target and a discussion about the risks that may 

impede achievement of the price target and (2) whether the firm was 

making a market in the subject company’s securities at the time the 

research report was published.



Sources: NASD Rule 2711, SEC Release No. 34-45908, and SEC Press 

Release 2002-63.



[End of table]



In 2002, Nasdaq and NYSE also announced plans to strengthen corporate 

governance through new listing standards.[Footnote 73] In May and July 

2002, Nasdaq announced that its board of directors had approved 

modifications to several of its corporate governance standards. Both 

NYSE and Nasdaq have proposed similar changes.[Footnote 74] According 

to Nasdaq officials, it is in the process of harmonizing its proposed 

listing standards with the provisions set forth in the Sarbanes-Oxley 

Act. Nasdaq’s planned rule changes include the following:



* tightening the definition of an independent director;



* requiring corporate boards to have a majority of independent 

directors;



* requiring regular meetings of independent directors in executive 

session;



* strengthening the role of independent directors in compensation and 

nomination decisions;



* requiring corporate codes of conduct;



* mandating continuing director education;



* requiring that related-party transactions be approved by an issuer’s 

audit committee or comparable body;



* clarifying that a company can be delisted for misrepresenting 

information to Nasdaq;



* requiring that companies disclose the receipt of an audit opinion 

with a going concern qualification;



* requiring shareholder approval for stock option plans and changes;



* permitting companies to disseminate material information via 

Regulation FD (Fair Disclosure)-compliant methods of disclosure, 

instead of solely by a press release;[Footnote 75]



* prohibiting loans to officers and directors consistent with the 

Sarbanes-Oxley Act; and:



* requiring that non-U.S. issuers disclose any exemptions to corporate 

governance requirements.



On August 1, 2002, NYSE’s board of directors approved standards and 

changes in the corporate governance and practices of NYSE-listed 

companies that were first announced on June 6, 2002. These new 

standards seek to further strengthen issuer accountability, integrity, 

and transparency. NYSE also views them as an opportunity to strengthen 

the checks and balances among investors, issuers, and the NYSE market. 

According to NYSE officials, it has harmonized its proposed listing 

standards with the provisions set forth in the Sarbanes-Oxley Act. On 

August 16, 2002, NYSE filed the proposed rule change with SEC for its 

approval. Some of the final changes would include the following:



* requiring corporate boards to have a majority of independent 

directors;



* requiring that boards affirmatively determine that independent 

directors have no material relationship with the listed company;



* lengthening the “cooling-off” period for former employees and 

independent auditors before they could serve as an independent director 

of the company they worked for or audited;



* enhancing the independence requirements applicable to the independent 

audit committee, and increasing the authority and responsibility of 

that committee, including granting it the sole authority to hire and 

fire the independent auditors;



* requiring listed companies to have nominating, corporate governance, 

and compensation committees composed entirely of independent directors;



* requiring nonmanagement directors to meet at regularly scheduled 

executive sessions without management;



* requiring listed companies to have an internal audit function;



* requiring listed companies to adopt and disclose governance 

guidelines, codes of conduct and ethics, and charters with specified 

provisions for the independent audit, nominating, and compensation 

committees;



* requiring shareholder approval for equity compensation plans;



* requiring an annual CEO certification of compliance with NYSE 

corporate governance standards; and:



* providing for NYSE to issue a public reprimand letter to a listed 

company that violates an NYSE governance listing standard, although 

delisting remains the ultimate penalty.



Although Nasdaq’s and NYSE’s proposed changes to their listing 

standards are important and positive steps, more could be done to 

strengthen corporate governance. For example, the proposals do not 

require a supermajority of independent directors, do not specifically 

bar a CEO from serving as chairman of the board of directors, could 

more broadly address interlocking directorships, and do not require 

that key board committees have their own resources and access to 

independent advisers as and when they deem necessary.[Footnote 76] As 

these standards are being reviewed and finalized, we believe these 

issues continue to deserve ongoing consideration by the stock markets 

and SEC, as appropriate.



Finally, SEC is again exploring whether additional oversight could 

apply as a condition to being recognized as an NRSRO. In 1994, SEC 

issued a concept release requesting public comment on the appropriate 

role of credit ratings in the federal securities laws, and the need to 

establish formal procedures for designating and monitoring the 

activities of NRSROs.[Footnote 77] In response to comments on this 

release, in 1997, SEC proposed a rule that would have adopted a 

definition of the term NRSRO that set forth the criteria a rating 

organization would have to satisfy to be acknowledged as an NRSRO. To 

date, there has been no action on this proposal.[Footnote 78]



SEC Faces Ongoing Human Capital Resources, Technology, and Process 

Challenges:



Effectively managing its human capital resources, technology, and 

processes is likely to remain a challenge for SEC in the future. As we 

reported earlier this year, SEC faces challenges in effectively 

carrying out its regulatory activities because of existing workload and 

staffing imbalances.[Footnote 79] In particular, we found that SEC’s 

ability to review corporate filings has been strained, resulting in 

fewer corporate filings being reviewed each year. Likewise, we found 

that the number of enforcement actions pending at the end of the year 

had increased substantially. SEC officials noted that these 

circumstances were also due to the increasing complexity of accounting 

and disclosure, which require more time to review filings and 

investigate matters. In addition to increasing workloads, CorpFin and 

Enforcement have had to manage high turnover rates and large numbers of 

staff vacancies.[Footnote 80] SEC’s current experience with hiring 

additional staff (authorized by its supplemental appropriation for its 

fiscal year 2002) illustrates that SEC is likely to face ongoing 

challenges in filling many of these positions, especially accountants. 

The supplemental appropriation gives SEC the authority to hire 100 

additional staff, which according to SEC, would be best filled by 

primarily hiring accountants. SEC officials stated that while they are 

committed to hiring a significant number of accountants with the 

supplemental appropriation, the personnel process required for hiring 

accountants is more time consuming and cumbersome than the process for 

hiring attorneys.[Footnote 81] They added that this might result in SEC 

hiring more attorneys to fill the currently available positions.



In addition to challenges in recruiting and hiring staff, SEC faces 

ongoing human capital management challenges, as discussed in our 

September 2001 report--which found that although compensation was the 

primary reason staff left or would consider leaving SEC, SEC has other 

human capital challenges to address.[Footnote 82] SEC now has pay 

parity, the ability to pay employees on par with other federal banking 

agencies.[Footnote 83] When funded and fully implemented pay parity 

should help SEC attract and retain staff, but higher compensation alone 

cannot solve SEC’s retention challenges in the future. Because SEC’s 

employees can always opt for higher private-sector pay, SEC’s efforts 

to enhance its human capital programs as a means to recruit and retain 

employees will become more important. For example, our 2001 survey of 

current and former SEC accountants, attorneys, and examiners provided 

useful information that SEC management can use to identify key 

opportunities to improve employee job satisfaction, including 

advancement opportunities, the appraisal process, the performance 

incentive system, and the work review process.



SEC also faces future challenges in the technology. As we identified in 

our SEC resources report, budgetary limitations have historically 

confined SEC’s technology budget to fund hardware and software 

maintenance and technology infrastructure needs. The Sarbanes-Oxley Act 

authorized a budget increase that would begin to allow SEC to fund some 

of its existing unfunded technology needs, such as purchasing 

technology that would enhance the ability of reviewers to detect trends 

in corporate filings and better leverage SEC’s limited staff. However, 

to effectively enhance SEC’s technological base, SEC will need to 

develop a process to prioritize technology needs and explore ways to 

more fully utilize available technology that will allow it to leverage 

existing staff resources. According to SEC officials, this is an area 

that SEC had not fully explored due to resource constraints but holds 

promise for strengthening the agency’s regulatory efforts in the 

future. Moreover, additional funding in this area may enable SEC to 

reinvigorate certain regulatory efforts, including enforcement and 

corporate filing reviews, by making greater and more effective use of 

technology.



Going forward, SEC also faces a number of process-oriented challenges 

as it attempts to rebalance its existing responsibilities, which 

include reviewing filings and enforcing securities laws, with its new 

responsibilities under the Sarbanes-Oxley Act. An effective strategic 

planning process is particularly important to help SEC stay abreast of 

ongoing and future challenges. As we reported in March 2002, SEC had 

not engaged in a comprehensive strategic planning process that would 

enable it to proactively manage its dynamic regulatory 

responsibilities.[Footnote 84] However, since that time, SEC has taken 

the first step in developing a comprehensive process by engaging a 

consulting firm to help it review existing operations. Once this review 

is complete, SEC will be in a position to develop a dynamic 

comprehensive strategic planning process that better addresses its 

mission goals and staffing needs.



Finally, the Sarbanes-Oxley Act increases the demands placed on SEC to 

effectively manage its human capital resources and put processes in 

place that will allow it to effectively carry out its new duties and 

responsibilities that are important to restoring and maintaining 

shareholder confidence in U.S. markets. Among the most important of 

SEC’s new responsibilities is its role in the oversight of the Board, 

which in turn is charged with overseeing the accounting profession. As 

mentioned earlier, SEC has always had an important role in overseeing 

the financial reporting process. However, in the future SEC will have 

increased responsibilities associated with the role it is expected to 

play in ensuring that the Board effectively discharges its duties.



Observations:



The significant increase in the number of financial statement 

restatements and their impact on markets, shareholders, and employees, 

raise a number of important questions that warrant further analysis but 

were beyond the scope of this review. These questions include 

determining (1) which public accounting firms audited the 919 

restatements we identified, (2) whether they were new or existing 

auditors, (3) what role the auditors played in identifying the issue 

that resulted in the restatement, and (4) whether the auditors raised 

concerns about any questionable accounting practices before the 

restatement. We plan to address many of these questions and similar 

issues in our ongoing work in this area, which includes a study on 

mandatory audit rotations required by the Sarbanes-Oxley Act. In 

addition, our analysis of SEC’s enforcement actions involving 

accounting-related cases also raises questions about the adequacy and 

timeliness of SEC’s activity in this area and the sanctions being 

sought by SEC in light of the violations. The Sarbanes-Oxley Act 

requires that SEC complete two studies on violators and violations, 

including individuals and entities that have and have not been charged, 

and enforcement actions involving financial report violations imposed 

over the past 5 years. These studies should provide additional 

information and analysis that will expand on that done in this report.



The limitations discussed concerning the current governance and 

oversight structure raise issues that must also be addressed as the new 

structure is being implemented. Effective governance structures 

composed of highly qualified individuals are key to the success of any 

organization and system on which others must rely. In this regard, 

several factors are important to the successful implementation of this 

new structure. First, members of the new oversight board must not only 

meet high qualifications and independence requirements, but also fully 

embrace the principles articulated in the act and the need for 

fundamental reform. Second, the Board, once established, should provide 

active and ongoing input to the accounting profession. Third, the Board 

must ensure that meaningful audit standards are adopted and that they 

are being followed. Fourth, the Board should ensure that its policies 

and actions are structured so as to encourage all parties to “do the 

right thing.” Fifth, the Board should ensure that a reasonable degree 

of transparency exists in connection with its actions and activities. 

Finally, the Board must swiftly and appropriately punish wrongdoers.



Agency Comments and Our Evaluation:



The Director, CorpFin, provided written comments on a draft of this 

report that are reprinted in appendix II. SEC commented that the report 

was thorough and reiterated several of our major findings. First, SEC 

commented about the difficulty of isolating the impact of restatements 

on market capitalization, but noted that our thorough methodology and 

review of available resources gives the most complete picture feasible. 

SEC also agreed that the report identified and confirmed a number of 

important developments. Specifically, SEC listed the significant 

increase in restatements, the increase in the number of large companies 

restating, and the fact that revenue recognition and improper expense 

accounting are among the most common reasons for restating. Second, SEC 

stated that it is fully committed to the rule-making and other 

activities needed to fully implement “the letter and spirit of the 

Act.” SEC added that it is particularly mindful of our observations 

concerning the selection of members of and implementation of the Board. 

Third, SEC noted that the quantitative work in this report lays the 

groundwork for its mandated study on SEC enforcement actions involving 

violations of reporting requirements over the past 5 years. Finally, 

SEC expressed its commitment and resolve, given the additional 

resources that the Sarbanes-Oxley Act identified as necessary for SEC 

to carry out its responsibilities, to meet its ongoing human capital, 

technology, and process challenges.



We requested and received technical comments from officials of NASD, 

Nasdaq, NYSE, and Amex on selected excerpts of a draft of this report 

and incorporated their comments into this report as appropriate.



We also requested comments on drafts of the cases from the 16 companies 

selected as case studies. We received technical comments from 8 of the 

16 companies and incorporated their comments into this report as 

appropriate. The remaining eight companies either informed us that they 

had “no comments” or did not respond to our request.



As agreed with your office, we plan no further distribution of this 

report until 30 days from its issuance unless you publicly release its 

contents sooner. At that time, we will send copies of this report to 

the Ranking Minority Member of the Senate Committee on Banking, 

Housing, and Urban Affairs; the Chairman and Ranking Minority Member of 

the Senate Subcommittee on Securities and Investment, Senate Committee 

on Banking, Housing, and Urban Affairs; the Chairman and Ranking 

Minority Member, Senate Committee on Governmental Affairs; the Chairman 

and Ranking Minority Member, House Committee on Financial Services; and 

other interested congressional committees. We will also send copies to 

the Chairman of SEC and will make copies available to others upon 

request. In addition, this report is also available on GAO’s Web site 

at no charge at http://www.gao.gov.



If you or your staff has any questions regarding this report, please 

contact Ms. Orice M. Williams or me at (202) 512-8678.



Sincerely yours,



Davi M. D’Agostino

Director, Financial Markets and 

   Community Investment:



Signed by Davi M. D’Agostino



[End of section]



Appendixes:



[End of section]



Appendix I: Objectives, Scope, and Methodology:



As agreed with your staff, our objectives were to (1) determine the 

number of, reasons for, and other trends in financial statement 

restatements since 1997; (2) analyze the impact of restatement 

announcements on the restating companies’ stock market capitalization; 

(3) research available data to determine the impact of financial 

statement restatements on investors’ confidence in the existing U.S. 

system of financial reporting and capital markets; (4) analyze the 

Securities and Exchange Commission (SEC or Commission) enforcement 

actions involving accounting and auditing irregularities; and (5) 

describe the major limitations of the existing oversight structure and 

steps that have been and are being taken to ensure the integrity of 

corporate financial disclosures and ongoing challenges.



Identifying the Number of and Reasons for Financial Statement 

Restatements:



To determine the number of and reasons for financial statement 

restatements since 1997, we identified financial statement restatements 

announced from January 1, 1997, through June 30, 2002, using the Lexis-

Nexis online information service to search for press releases and other 

media coverage on financial statement restatements. When developing our 

search methodology for identifying financial statement restatements, we 

reviewed the approaches used in several academic and nonacademic 

research papers.[Footnote 85] Using the Lexis-Nexis “Power Search” 

command and the “US News, Combined” database, we performed a keyword 

search using “restate,” “restates,” “restated,” “restating,” or 

“restatement” within 50 words of “financial statement” or “earnings.” 

We also used other variations such as “adjust” and “amend” and 

“revise.” In addition, we included some restatements identified through 

other sources such as SEC.



To our knowledge no comprehensive, authoritative database of financial 

statement restatements exists. While several academic and nonacademic 

researchers have constructed and maintained their own financial 

statement restatement databases, these lists are generally proprietary 

and are not publicly available. Moreover, these researchers use 

different methods and criteria for constructing their databases, as 

well different sample periods, making it difficult to directly compare 

the database of financial statement restatements that we constructed 

with the databases that others have compiled.[Footnote 86] Because we 

were unable to determine its relative completeness or accuracy, our 

database, which included 919 restatement announcements, should be 

viewed as a sample of financial statement restatements identified using 

our particular search methodology and the results of our analysis 

should be viewed in this context.



Although there are many reasons for financial statement restatements, 

most restatements are routine and do not indicate accounting 

irregularities. We specified accounting irregularities to include so-

called “aggressive” accounting practices, intentional and 

unintentional misuse of facts applied to financial statements, 

oversight or misinterpretation of accounting rules, and fraud. Also, we 

included each restatement, regardless of its impact on the restating 

company’s financials, in our database.



However, we excluded restatement announcements that resulted from 

normal corporate activity or simple presentation issues--unless there 

was some irregularity involved. For example, we excluded financial 

statement restatements resulting from mergers and acquisitions, 

discontinued operations, stock splits, issuance of stock dividends, 

currency-related issues (for example, converting from Canadian dollars 

to U.S. dollars), changes in business segment definitions, changes due 

to transfers of management, changes made for presentation purposes, 

general accounting changes under generally accepted accounting 

principles (GAAP), litigation settlements, and arithmetic and general 

bookkeeping errors. As a general rule, we also excluded restatements 

resulting from accounting policy changes.[Footnote 87] We excluded 

these financial statement restatements because they did not necessarily 

reveal previously undisclosed, economically meaningful data to market 

participants.



Once a relevant restatement was identified, we classified it into 1 or 

more of 13 categories based on the information presented in the initial 

restatement announcement and collected other relevant 

information.[Footnote 88] For purposes of analysis, we further 

collapsed these 13 categories into 9 categories--(1) acquisition and 

merger related; (2) cost or expense related; (3) in-process research 

and development related; (4) reclassification;

(5) related-party transactions; (6) restructuring, assets, or 

inventory; (7) revenue recognition; (8) securities related; and (9) 

other.[Footnote 89] Our classification closely resembles that employed 

by FEI and Wu (2001) and HCG (2002). Finally, to determine 

characteristics of the companies restating their financial reports, we 

collected information on market capitalization values, total assets, 

and Standard Industrial Classification codes for the restating 

companies we identified.



Determining the Impact of Financial Statement Restatements on Market 

Values of Restating Companies:



To analyze the impact of restatement announcements involving accounting 

irregularities on the stock market value of restating companies, we 

used the standard event study approach. The event to be measured was 

the initial announcement from January 1, 1997, to March 26, 2002, of a 

financial statement restatement involving accounting irregularities by 

a publicly traded company with common stock issued on the New York 

Stock Exchange (NYSE), National Association of Securities Dealers 

Automated Quotation (Nasdaq) National Market System or SmallCap venue, 

American Stock Exchange (Amex), or the over-the-counter (OTC) bulletin 

board or Pink Sheets. Throughout, we refer to the subset of companies 

with stock traded on NYSE, Nasdaq, and Amex as “listed.” We obtained 

historical stock price data for the relevant listed companies from 

NYSE’s Trade and Quote (TAQ) database. This database contains detailed 

records of all quotes and transactions made for all NYSE, Nasdaq NMS 

and SmallCap, and Amex issues.[Footnote 90]



Although we identified 919 restatement announcements from January 1, 

1997, to June 30, 2002, we excluded some restatements from our analysis 

for a number of reasons. First, we excluded restatements by companies 

with stock traded on the OTC bulletin board or Pink Sheets because we 

did not have access to reliable historical price data for these stocks. 

We estimated that the exclusion of these unlisted companies would have 

a negligible impact on our market capitalization results, as companies 

with stock traded on the OTC bulletin board and Pink Sheets tend to be 

smaller in terms of market capitalization, but it is not clear whether 

their exclusion will introduce positive or negative bias in our average 

holding period abnormal returns results. Secondly, we excluded initial 

restatement announcements after March 26, 2002, the last trading day 

covered by our TAQ data subscription that allowed us to perform the 

necessary calculations for our analysis. Finally, we excluded from our 

analysis any restatement by a company that had extensive portions of 

data missing during the relevant time period around the restatement 

announcement. Missing data were generally attributable to extended 

trading suspensions, stock delistings, bankruptcies, and 

mergers.[Footnote 91] However, TAQ was also missing data for several 

listed companies; thus, we excluded these companies from our analysis. 

We cannot estimate the impact that these exclusions would have on our 

reported results. To the extent a company’s stock price declined 

following delisting, our analysis would be biased toward understating 

the impact of financial statement restatement announcements. To address 

these issues, we performed separate analyses on subsets of these cases 

using alternative stock price data.



To determine the impact of the restatement announcement on a company’s 

stock price, we identified the trading day that corresponded with the 

initial announcement date. Although many companies announced their 

restatements during or before normal trading hours on a trading day, 

others publicly announced their financial statement restatement after 

the close of trading or on a nontrading day. In these cases, we defined 

the announcement day as the next trading day. We then identified the 

relevant trading days before and after the restatement announcement, 

collectively known as the event window. To analyze the immediate impact 

of financial statement restatement announcements, we specified the 

immediate event window as the period from the trading day before the 

announcement through the trading day after the announcement. To analyze 

the longer-term impact of restatement announcements, we also specified 

an intermediate event window of approximately 6 calendar months, which 

included 60 trading days (3 months) before the announcement through 60 

trading days (3 months) after the announcement.[Footnote 92]



To assess the impact of the restatement announcement on a company’s 

stock price, we calculated the “abnormal return” of the stock over the 

event window. The abnormal return is the realized rate of return of a 

stock over the event window minus the expected return of that stock 

over the same period. The realized, or actual, rate of return of a 

stock of company i from date t-1 to date t is defined as



[See PDF for image]



in which Pit is the closing price of the stock at date t, Pi,t-1 is the 

closing price of the stock at date t-1, and Dit reflects any dividend 

payment made at date t. The expected return is defined as the rate of 

return of the stock (predicted by some valuation model) that is 

expected under the assumption that the event does not occur. In this 

way, the abnormal return is designed to capture the impact of the event 

on the stock. For any company i and date t,



[See PDF for image]



in which Ait is the abnormal return of the stock of company i on date 

t, Rit is the realized return of the stock of company i on date t, and 

E(Rit|Xt) is the expected return of the stock of company i on date t 

conditioned on some information set, Xt. We used the rate of return of 

the Wilshire Total Market Index on date t as our conditioning 

information, Xt.[Footnote 93]



To calculate the abnormal return, we first specified a statistical 

model for estimating the expected return of the stock of company i on 

date t. We used a standard market model, which relates the rate of 

return of the stock of i to the return of the overall market as:



[See PDF for image]



in which e it is an error term and a i and b i are the parameters of the 

market model. In this specification, a i and b i are the intercept and 

slope, respectively, of the linear relationship between the return of 

the stock of company i on date t and the return of the market on date 

t.[Footnote 94] The parameter, b i, is a measure of the covariation 

between the returns of the stock of i and the returns of the market. In 

this way, the expected return is risk-adjusted, taking into account the 

risk of stock i relative to the overall market. Next, we estimated the 

parameters of the model using a subset of the data. This subset, 

referred to as the “estimation window,” included approximately 120 

trading days (typically about 6 calendar months) of daily closing price 

data through the day prior to the initial restatement 

announcement.[Footnote 95] We estimated the market model using the 

ordinary least squares estimation procedure for each of the companies 

for which we had sufficient data. Each estimation produced parameter 

estimates for a i and b i, ai and bi respectively, for the given 

company and estimation window. The parameter estimates were 

subsequently used to generate an estimate of the expected return, 

E(Rit|Xt), for each stock i at each date t using the market model. This 

estimate of the expected return, Nit, was determined as:



[See PDF for image]



Using this expected return, we also calculated an estimate of the 

expected stock price for each stock i at each date t, Qit, as:



[See PDF for image]



We then calculated the abnormal return for each stock based on the 

results of our estimation. For any company i and date t, the estimated 

abnormal return, Lit, was:



[See PDF for image]



We also calculated the estimated unexpected, or market-adjusted, change 

in the stock price of i from t-1 to t, Uit, as:



[See PDF for image]



To measure the impact of the restatement announcement on the stock of 

company i, we calculated the abnormal return over the holding period 

from day -1 to day +1 to capture the immediate impact, and we 

calculated the abnormal return over the holding period from day -60 to 

day +60 to capture the intermediate impact. We also calculated the 

immediate impact on the market capitalization of company i by 

multiplying the difference between the actual stock price on day +1 and 

the expected price on day +1 (the immediate market-adjusted change in 

price) by the number of shares outstanding, and we calculated the 

intermediate impact on the market capitalization of company i by 

multiplying the difference between the actual stock price on day +60 

and the expected price on day +60 (the intermediate market-adjusted 

change in price) by the number of shares outstanding.[Footnote 96] To 

assess the overall impact of the general event of a restatement 

announcement, we averaged individual holding period abnormal returns 

over all restatement announcement events in our sample for both the 

immediate and intermediate time frames, and we summed all of the 

unadjusted and adjusted market changes in price for both the immediate 

and intermediate time frames.[Footnote 97]



For the companies that dropped out of our sample from the immediate to 

the intermediate event window due to trading suspensions, delistings, 

bankruptcies, and mergers, among other reasons, we attempted to capture 

the longer-term impact of their financial restatement announcements in 

a separate analysis using unadjusted data. For each such company, we 

identified its status approximately 3 months after its initial 

restatement announcement using Lexis-Nexis and other sources--whether 

it was a going concern, bankrupt, or merged with or was acquired by 

another company. If a company were a going concern, we estimated its 

market capitalization using publicly available data from Nasdaq or Pink 

Sheets and SEC, and estimated the change in market value from 60 

trading days before the restatement announcement. If a company went 

bankrupt, we estimated the loss in market capitalization by assuming a 

total loss. We did not attempt to estimate the impact for a company 

that merged with or was acquired by another company.



The usual interpretation of abnormal returns over an event window is 

that they measure the impact of the event on the value of a company’s 

stock. This interpretation may be misleading due to other firm-specific 

or market factors. Our simple market model attempted to account for 

only the overall market’s effect on the stock. One of the more relevant 

factors in this event study was the simultaneous release of the 

restatement announcement and scheduled financial statements to the 

market. For example, a company may have issued its first quarter 2000 

earnings that could have missed, met, or exceeded the market’s 

expectations while also announcing that it was restating previously 

issued financial statements from 1998 and 1999. To the extent that this 

was an issue, our results could be biased in either direction and, 

hence, attributing abnormal returns solely to the restatement 

announcement could be misleading. Another potential factor is 

information leakage. Events such as the announcement of an SEC inquiry, 

internal or external accounting review, or abrupt departure of a 

company’s chief executive officer or chief financial officer may be an 

early indication that a financial restatement is forthcoming. 

Furthermore, it is important to note that as we increase the time 

period over which we attempt to assess the impact of the restatement on 

a particular stock, there can be many other factors influencing the 

behavior of the stock price. To the extent that other influences on the 

price are significant, our intermediate results reflect not only the 

impact of the restatement announcement but these factors as well.



Additionally, there are potential sources of bias in our estimation 

procedure. Some of the more important involve event-date uncertainty, 

violations of our statistical assumptions, and using daily closing 

stock prices. While our event study methodology assumes that we are 

able to precisely identify the event date with certainty, this 

sometimes involved a certain amount of judgment. The announcement of a 

financial statement restatement typically only provides the date of the 

announcement; whether the announcement was made before, during, or 

after trading on that date may not be clear. Another possible source of 

bias stems from violation of our standard statistical assumptions.

[Footnote 98] A further potential source of bias in our 

estimation involves using the daily closing prices of stocks. In the 

event study framework, we implicitly assumed that these daily closing 

prices were recorded at identical time intervals each day. However, 

this assumption is easily violated because the last transaction for a 

given stock can and generally does occur at a different time each day. 

Additionally, some of the stocks in our event study were “thinly” or 

infrequently traded, and several days could elapse between 

transactions. Referring to the last recorded prices as daily closing 

prices assumed that closing prices are equally spaced at 24-hour 

intervals, which is not the case. To the extent that this assumption is 

violated, our results may be biased.



Overall, our analysis focused on the impact of a company’s restatement 

announcement on its market capitalization. Therefore, we did not take 

into account the effects on market participants with short positions or 

various options positions, nor did we gauge the impact on the company’s 

bondholders. To whatever extent--whether positively or negatively--

these market participants were affected by financial statement 

restatements, our results are necessarily incomplete.



Determining the Impact of Financial Statement Restatements on Investor 

Confidence:



To analyze impact of financial statement restatements on the confidence 

of market participants, we relied principally on outside sources. 

Namely, we identified indexes of investor confidence, located 

quantitative research on the issue, conducted interviews with experts 

in the field and collected data on mutual fund flows as a proxy for 

investor sentiment. The survey-based indexes of investor confidence 

were obtained from UBS Americas, Inc., and the International Center for 

Finance at the Yale School of Management. The Nobel Laureate economist, 

Dr. Lawrence Klein, acknowledged the UBS Index for its accuracy and 

timeliness. The Yale School of Management Indexes are considered to be 

the longest running effort to measure investor confidence and the 

project is directed by one of the leading experts in the field, Dr. 

Robert Shiller. We were also able to collect survey results about the 

direct impact of restatements on investor confidence from UBS Americas. 

Although the literature on the impact of restatements on investor 

confidence is sparse, we identified two such studies. The results of 

both studies were consistent with the hypothesis that investor 

confidence has been negatively impacted by financial statement 

restatements. However, we were not able to quote or cite one study, as 

the results were preliminary at the time of this report’s issuance. To 

gain further insight, we also interviewed some experts in the field and 

summarized their responses to a set of questions regarding accounting 

practices, financial statement restatements and investor confidence. 

Finally, we collected data on mutual fund flows from the Investment 

Company Institute, a popular source for statistical data on the mutual 

fund industry.



Analysis of SEC’s Accounting-Related Enforcement Activities:



To analyze SEC enforcement actions involving accounting and auditing 

irregularities, we reviewed 150 SEC-identified Accounting and Auditing 

Enforcement Releases (AAER)[Footnote 99] issued from January 1, 2001, 

through February 28, 2002. For these cases we identified the most 

common types of accounting and auditing-related securities law 

violations, against whom SEC enforcement actions have been brought 

recently, and the type of penalties imposed by SEC. We defined “most 

common” as violations constituting more than 20 percent of the total 

number of violations we found in the 150 AAERs. Because multiple 

individual are often sanctioned, we did not include all individual 

parties named in the AAER when determining the frequency of a 

violation. For example, AAERs in which two individuals were charged 

with the same securities violation, were counted as one violation for 

purposes of analysis. We also collected other common information 

disclosed in the AAERs such as the individuals and companies charged in 

the cases and the sanctions levied. To describe the process that SEC 

uses to develop an enforcement case, including whom to include as a 

defendant in the case and penalties to assess, we used a variety of 

information provided by SEC and interviews with officials from SEC’s 

Divisions of Enforcement and Corporation Finance[Footnote 100] and 

Office of the Chief Accountant. To obtain historical general 

enforcement and accounting-related enforcement actions, we also used 

summary AAER analysis done by SEC for fiscal years 1999 and 2000 and 

SEC annual reports.



Collecting Information on Current and Proposed Accounting and Financial 

Reporting Oversight Structures:



To describe the current regulatory, corporate and market approaches to 

protecting investors and ensuring capital market integrity, we reviewed 

relevant GAO reports and testimonies, SEC testimonies and speeches, 

published articles, congressional hearings documents, and other 

available information. We also interviewed various SEC officials and 

reviewed the federal securities laws. To determine proposed regulatory 

approaches to protect investors and ensure capital market integrity, we 

reviewed relevant proposals from GAO, SEC, private self-regulatory 

bodies (e.g., NYSE), Congress, academia, and others. To gain a better 

understanding of SEC’s statutory authority to bring enforcement action 

against securities analysts and credit rating agencies and any action 

taken against them, we interviewed officials of SEC’s Divisions of 

Enforcement, Investment Management, and Market Regulation; and we 

reviewed the federal securities laws. To the extent possible, we 

determined the roles that key players, such as auditors and company 

senior management played. We selected 16 financial restatements for in-

depth case study. The cases were selected based on asset size, 

restatement period, percentage change in earnings following the 

restatement, reason for the restatement, and market where stock traded.



We did our work in Washington, D.C., between February and September 

2002, in accordance with generally accepted government auditing 

standards.



[End of section]



Appendix II Comments from the Securities and Exchange Commission:



September 20, 2002:



Thomas J. McCool Managing Director, Financial Markets and Community 

Investment U.S. General Accounting Office Washington, D.C. 20548:



Dear Mr. McCool:



Thank you for the opportunity to review and comment on the General 

Accounting Office’s draft report entitled “Financial Statement 

Restatements: Trends, Market Impacts, Regulatory Responses, and 

Remaining Challenges.” We recognize the efforts of you and your staff 

in completing this thorough review on such an expedited basis, and we 

thank you for sharing your findings with us.



Isolating the impact of restatements on market capitalization is a very 

difficult endeavor, especially in the ever-changing circumstances faced 

by companies in our nation’s markets. We believe that your thorough 

methodology and review of the available sources and resources gives the 

most complete picture that is practically feasible of this difficult 

question. Your efforts are commendable, as are your efforts to 

determine the impact of financial statement restatements on investor 

confidence. Your study identified and confirmed a number of important 

developments: first, that the number of restatements has significantly 

increased in recent years; second, that the number of large company 

restatements has increased; and third, that errors in revenue 

recognition and improper expense accounting are among the most common 

reasons for financial statement restatement.



As your report notes, the SEC has sought to move promptly and 

vigorously in the light of these developments. The number of our cases 

involving financial reporting has increased in recent years, and is at 

record levels for 2002. We have been emphasizing “real-time 

enforcement”, bringing cases as quickly as possible both to increase 

the deterrent effect of our enforcement activities and to reduce losses 

and increase recoveries to investors to the extent possible. We are 

also seeking disgorgement, officer and director bars and other 

important remedies at unprecedented levels. We are grateful you have 

acknowledged our effort to implement real time enforcement and the 

obstacles we continue to face in this effort. In carrying out these 

activities, we are part of the processes that the legislative and 

executive branches, regulators and self-regulators have put in motion 

to strengthen corporate governance, improve financial reporting and 

restore investor confidence.



The Sarbanes-Oxley Act of 2002 represents the most far-reaching 

government response to date to the extremely troubling environment 

described in the Report. The SEC is fully committed to the rule-making 

and other activities that fully implement the letter and spirit of the 

Act. In that regard, we are, of course, particularly mindful of your 

observations regarding the selection of the members of and 

implementation of the provisions of the Act regarding the newly 

established Public Company Accounting Oversight Board. We are committed 

to assuring the effectiveness and integrity of this board and look 

forward to your report on the new structure.



In addition, as you know, Section 704 of the Act requires the 

Commission to review and analyze Commission enforcement actions 

involving violations of reporting requirements imposed under the 

securities laws and restatements of financial statements over the past 

five years. Your report will provide valuable insight and assistance to 

the Commission in its implementation of this key provision. The purpose 

of the review is “to identify areas of reporting that are most 

susceptible to fraud, inappropriate manipulation or inappropriate 

earnings management.” The quantitative work in your report lays the 

groundwork for us to carry out this important task.



We further note that, pursuant to the requirements of the Act, the GAO 

is called on to perform a study of mandatory audit rotation. We look 

forward to providing any assistance that you might seek from us in 

undertaking that study and look forward to working with you.



In addition, we appreciate your recognition of the ongoing human 

capital resources, technology and process challenges we face, 

especially in the areas of enforcement and review of public company 

disclosures. We are committed, given the additional resources that the 

Sarbanes-Oxley Act identifies as necessary for the Commission to carry 

out its responsibilities and our strong resolution to fulfill our 

responsibilities, to meet those challenges.



Thank you and your staff for the courtesy extended during this review.



Alan L. Beller, Director:



[Signed by Alan L. Beller]



[End of section]



Appendix III: Listing of Financial Statement Restatement Announcements, 

1997-June 2002:



1997;



1; Acacia Research Corporation.



2; Alabama National BanCorp.



3; America Online, Incorporated.



4; American Business Information, Incorporated.



5; American Standard Companies Incorporated.



6; AMNEX, Incorporated.



7; Ancor Communications, Incorporated.



8; Arrhythmia Research Technology, Incorporated.



9; Arzan International (1991) Limited.



10; Ascent Entertainment Group, Incorporated.



11; Astrocom Corporation.



12; Caribbean Cigar Company.



13; Carrington Laboratories, Incorporated.



14; Centennial Technologies Incorporated.



15; Computron Software, Incorporated.



16; Concorde Career Colleges, Incorporated.



17; Craig Consumer Electronics Incorporated.



18; Discount Auto Parts Incorporated.



19; Donnkenny, Incorporated.



20; Dyna Group International Incorporated.



21; Electrosource, Incorporated.



22; Eltek Limited.



23; Federal-Mogul Corporation.



24; Fidelity Bancorp, Incorporated.



25; Fine Host Corporation.



26; First Colorado Bancorp, Incorporated.



27; First Merchants Acceptance Corporation.



28; First USA Paymentech, Incorporated.



29; First USA, Incorporated.



30; FOCUS Enhancements, Incorporated.



31; Fonix Corporation.



32; Foxmoor Industries Limited.



33; Genesco Incorporated.



34; Geographics, Incorporated.



35; GranCare, Incorporated.



36; Health Management, Incorporated.



37; HealthPlan Services Corporation.



38; Healthplex, Incorporated.



39; HMI Industries Incorporated.



40; Hudson Technologies Incorporated.



41; In Home Health, Incorporated.



42; Informix Corporation.



43; InPhyNet Medical Management, Incorporated.



44; International Nursing Services, Incorporated.



45; Israel Land Development Company.



46; Macerich Company.



47; Management Technologies Incorporated.



48; Material Sciences Corporation.



49; Medaphis Corporation.



50; Medaphis Corporation.



51; Mercury Finance Company.



52; Meridian National Corporation.



53; Micro-Integration Corporation.



54; Molten Metal Technology, Incorporated.



55; MRV Communications, Incorporated.



56; National Health Enhancement Systems, Incorporated.



57; National Steel Corporation.



58; National TechTeam, Incorporated.



59; Oak Industries Incorporated.



60; Paging Network, Incorporated.



61; Paracelsus Healthcare Corporation.



62; Pegasystems Incorporated.



63; PennCorp Financial Group, Incorporated.



64; Perceptron, Incorporated.



65; Perceptronics, Incorporated.



66; Photran Corporation.



67; Physicians Laser Services, Incorporated.



68; PictureTel Corporation.



69; Room Plus, Incorporated.



70; S3 Incorporated.



71; Safe Alternatives Corporation of America, Incorporated.



72; Santa Anita Companies.



73; Silicon Valley Research, Incorporated.



74; Simula, Incorporated.



75; Soligen Technologies, Incorporated.



76; St. Francis Capital Corporation.



77; Summit Medical Systems, Incorporated.



78; System Software Associates, Incorporated.



79; Thousand Trails, Incorporated.



80; Today’s Man, Incorporated.



81; Unison HealthCare Corporation.



82; United Dental Care, Incorporated.



83; Universal Seismic Associates, Incorporated.



84; Unocal Corporation.



85; UROHEALTH Systems, Incorporated.



86; USA Detergents Incorporated.



87; UStel Incorporated.



88; Video Display Corporation.



89; Waste Management Incorporated.



90; WebSecure Incorporated.



91; Wilshire Financial Services Group Incorporated.



92; Wiz Technology, Incorporated.



1998;



93; 3Com Corporation.



94; 4Health, Incorporated.



95; ADAC Laboratories.



96; Altris Software, Incorporated.



97; American Skiing Company.



98; Aspec Technology, Incorporated.



99; AutoBond Acceptance Corporation.



100; Boca Research, Incorporated.



101; Boston Scientific Corporation.



102; Breed Technologies, Incorporated.



103; Cabletron Systems, Incorporated.



104; Canmax Incorporated.



105; Castelle Incorporated.



106; Cendant Corporation.



107; COHR Incorporated.



108; Corel Corporation.



109; Cotton Valley Resources Corporation.



110; CPS Systems, Incorporated.



111; Creative Gaming Incorporated.



112; Cross Medical Products, Incorporated.



113; CyberGuard Corporation.



114; CyberMedia Incorporated.



115; Cylink Corporation.



116; Data I/O Corporation.



117; Data Systems Network Corporation.



118; Detection Systems, Incorporated.



119; Digital Lightwave, Incorporated.



120; Egobilt Incorporated.



121; Envoy Corporation.



122; EquiMed Incorporated.



123; Female Health Company.



124; Florafax International Incorporated.



125; Food Lion, Incorporated.



126; Forecross Corporation.



127; Foster Wheeler Corporation.



128; Galileo Corporation.



129; General Automation, Incorporated.



130; Glenayre Technologies, Incorporated.



131; Golden Bear Golf, Incorporated.



132; Green Tree Financial Corporation.



133; Guilford Mills, Incorporated.



134; Gunther International, Limited.



135; H.T.E., Incorporated.



136; Harnischfeger Industries.



137; Hybrid Networks, Incorporated.



138; Hybrid Networks, Incorporated.



139; IKON Office Solutions Incorporated.



140; Informix Corporation.



141; Integrated Sensor Solutions, Incorporated.



142; Interactive Limited.



143; International Home Foods, Incorporated.



144; International Total Services, Incorporated.



145; Kyzen Corporation.



146; Lernout & Hauspie Speech Products N.V.



147; Livent, Incorporated.



148; McDonald’s Corporation.



149; MCI Communications Corporation.



150; Media Logic, Incorporated.



151; Mego Mortgage Corporation.



152; Metal Management, Incorporated.



153; Microelectronic Packaging Incorporated.



154; Morrow Snowboards Incorporated.



155; MSB Financial Corporation.



156; National HealthCare Corporation.



157; Neoware Systems, Incorporated.



158; Newriders Incorporated.



159; Norland Medical Systems, Incorporated.



160; Outboard Marine Corporation.



161; Pegasystems Incorporated.



162; Peritus Software Services, Incorporated.



163; Peritus Software Services, Incorporated.



164; Philip Services Corporation.



165; Physician Computer Network, Incorporated.



166; Premier Laser Systems Incorporated.



167; Prosoft I-Net Solutions, Incorporated.



168; Raster Graphics, Incorporated.



169; Room Plus, Incorporated.



170; Rushmore Financial Group Incorporated.



171; Saf T Lok Incorporated.



172; Schlotzsky’s Incorporated.



173; ShoLodge, Incorporated.



174; Signal Technology Corporation.



175; SmarTalk Teleservices, Incorporated.



176; Sobieski Bancorp Incorporated.



177; Starbase Corporation.



178; Starmet Corporation.



179; Sterling Vision Incorporated.



180; SunTrust Banks, Incorporated.



181; Sunbeam Corporation.



182; Sybase Incorporated.



183; Telxon Corporation.



184; Total Renal Care Holdings, Incorporated.



185; Transcrypt International, Incorporated.



186; Trex Medical Corporation.



187; TriTeal Corporation.



188; Unitel Video, Incorporated.



189; Universal Seismic Associates, Incorporated.



190; USWeb Corporation.



191; Versar, Incorporated.



192; Versatility Incorporated.



193; Vesta Insurance Group Incorporated.



194; Wheelabrator Technologies Incorporated.



1999;



195; Acorn Products, Incorporated.



196; Advanced Polymer Systems, Incorporated.



197; Aegis Communications Group, Incorporated.



198; Allied Products Corporation.



199; Alydaar Software Corporation.



200; America Service Group Incorporated.



201; American Bank Note Holographics.



202; American Banknote Corporation.



203; AmeriCredit Corporation.



204; Annapolis National Bancorp.



205; Armor Holdings, Incorporated.



206; Assisted Living Concepts, Incorporated.



207; Assisted Living Concepts, Incorporated.



208; At Home Corporation.



209; Autodesk, Incorporated.



210; Avid Technology, Incorporated.



211; AvTel Communications Incorporated.



212; Aztec Technology Partners, Incorporated.



213; Baker Hughes Incorporated.



214; Bausch & Lomb, Incorporated.



215; BellSouth Corporation.



216; Belmont Bancorp.



217; Best Buy Incorporated.



218; Blimpie International, Incorporated.



219; Blue Rhino Corporation.



220; BMC Software, Incorporated.



221; Boston Chicken Incorporated.



222; Cabletron Systems, Incorporated.



223; Candence Design Systems, Incorporated.



224; Candie’s Incorporated.



225; Carleton Corporation.



226; Carnegie International Corporation.



227; CellStar Corporation.



228; CenterPoint Properties Trust.



229; Central Illinois Bancorp, Incorporated.



230; CHS Electronics, Incorporated.



231; CMGI Incorporated.



232; Colorado Casino Resorts, Incorporated.



233; Community West Bancshares.



234; CompUSA Incorporated.



235; CoreCare Systems, Incorporated.



236; Crown Group, Incorporated.



237; Cumetrix Data Systems Corporation.



238; CVS Corporation.



239; Cyberguard Corporation.



240; Dassault Systemes S.A.



241; Day Runner, Incorporated.



242; DCI Telecommunications, Incorporated.



243; Digi International Incorporated.



244; Discreet Logic, Incorporated.



245; Diversinet Corporation.



246; DSI Toys, Incorporated.



247; Dynamex Incorporated.



248; Engineering Animation, Incorporated.



249; Engineering Animation, Incorporated.



250; Evans Systems, Incorporated.



251; Fair Grounds Corporation.



252; FCNB Corporation.



253; Fidelity National Corporation.



254; Financial Security Assurance Holdings Limited.



255; Finova Group, Incorporated.



256; First Union Real Estate Equity and Mortgage Investments.



257; First Union Real Estate Equity and Mortgage Investments.



258; FlexiInternational Software, Incorporated.



259; Flowers Industries Incorporated.



260; Forest City Enterprises, Incorporated.



261; Friedman’s Incorporated.



262; GameTech International, Incorporated.



263; Gencor Industries, Incorporated.



264; GenRad, Incorporated.



265; Graham-Field Health Products, Incorporated.



266; GTS Duratek, Incorporated.



267; Gunther International, Limited.



268; Halifax Corporation.



269; Harken Energy Corporation.



270; High Plains Corporation.



271; Hitsgalore.com, Incorporated.



272; Hungarian Broadcasting Corporation.



273; Image Guided Technologies, Incorporated.



274; IMRglobal Corporation.



275; IMSI, Incorporated.



276; Infinium Software, Incorporated.



277; InfoUSA.



278; INSO Corporation.



279; Intasys Corporation.



280; INTERLINQ Software Corporation.



281; International Total Services, Incorporated.



282; ION Networks, Incorporated.



283; Kimberly-Clark Corporation.



284; Lab Holdings, Incorporated.



285; LabOne, Incorporated.



286; Leisureplanet Holdings, Limited.



287; Level 8 Systems.



288; Lightbridge, Incorporated.



289; LSI Logic Corporation.



290; Lycos, Incorporated.



291; Made2Manage Systems, Incorporated.



292; Maxim Group, Incorporated.



293; McKesson HBOC, Incorporated.



294; MCN Energy Group, Incorporated.



295; Medical Graphics Corporation.



296; Medical Manager Corporation.



297; Medical Waste Management.



298; MEMC Electronic Materials, Incorporated.



299; Metrowerks Incorporated.



300; Miller Industries, Incorporated.



301; Motorcar Parts & Accessories, Incorporated.



302; National Auto Credit, Incorporated.



303; National City Bancorp.



304; Network Associates, Incorporated.



305; Nichols Research Corporation.



306; North Face, Incorporated.



307; Northrop Grumman Corporation.



308; Novametrix Medical Systems Incorporated.



309; Nutramax Products, Incorporated.



310; ObjectShare, Incorporated.



311; ODS Networks, Incorporated.



312; Olsten Corporation.



313; Open Market, Incorporated.



314; Open Text Corporation.



315; Orbital Sciences Corporation.



316; Orbital Sciences Corporation.



317; Pacific Aerospace & Electronics, Incorporated.



318; Pacific Research & Engineering Corporation.



319; P-Com, Incorporated.



320; PDG Environmental Incorporated.



321; Pegasystems Incorporated.



322; Peregrine Systems, Incorporated.



323; Pharamaceutical Formulations, Incorporated.



324; Protection One, Incorporated.



325; PSS World Medical, Incorporated.



326; Rite Aid Corporation.



327; SafeGuard Health Enterprises, Incorporated.



328; Safeskin Corporation.



329; Safety Components International, Incorporated.



330; SatCon Technology Corporation.



331; Saucony, Incorporated.



332; Schick Technologies, Incorporated.



333; Schick Technologies, Incorporated.



334; Segue Software, Incorporated.



335; Signal Apparel Company, Incorporated.



336; The Sirena Apparel Group, Incorporated.



337; SITEK Incorporated.



338; Smart Choice Automotive Group.



339; SmarTalk TeleServices, Incorporated.



340; Spectrum Signal Processing Incorporated.



341; SS&C Technologies, Incorporated.



342; Styling Technology Corporation.



343; Sun Healthcare Group, Incorporated.



344; Telxon Corporation.



345; Texas Instruments Incorporated.



346; The Timber Company.



347; Thomas & Betts Corporation.



348; Total Renal Care Holdings, Incorporated.



349; TRW Incorporated.



350; Twinlab Corporation.



351; Unisys Corporation.



352; Vesta Insurance Group Incorporated.



353; Voxware, Incorporated.



354; VTEL Corporation.



355; Wabash National Corporation.



356; Wall Data Incorporated.



357; Wang Global.



358; Warrantech Corporation.



359; Waste Management Incorporated.



360; WellCare Management Group Incorporated.



361; Western Resources, Incorporated.



362; Wickes Incorporated.



363; Williams Companies.



364; Xilinx, Incorporated.



365; Yahoo! Incorporated.



366; Zenith National Insurance Corporation.



367; Ziegler Companies, Incorporated.



368; Zions Bancorp.



2000;



369; 1st Source Corporation.



370; 3D Systems Corporation.



371; Able Telcom Holding Corporation.



372; Acrodyne Communications, Incorporated.



373; Activision, Incorporated.



374; Advanced Technical Products, Incorporated.



375; Aetna Incorporated.



376; Allscripts Incorporated.



377; Alpharma Incorporated.



378; American Physicians Service Group, Incorporated.



379; American Xtal Technology.



380; Analytical Surveys, Incorporated.



381; Anicom Incorporated.



382; Asche Transportation Services, Incorporated.



383; Aspeon, Incorporated.



384; Atchison Casting Corporation.



385; Auburn National Bancorp.



386; Aurora Foods Incorporated.



387; Avon Products, Incorporated.



388; Aztec Technology Partners, Incorporated.



389; Baan Company.



390; BarPoint.com, Incorporated.



391; Bindley Western Industries, Incorporated.



392; Biomet, Incorporated.



393; Bion Environmental Technologies, Incorporated.



394; Boise Cascade Corporation.



395; BPI Packaging Technologies, Incorporated.



396; California Software Corporation.



397; CareMatrix Corporation.



398; Carnegie International Corporation.



399; Carver Bancorp, Incorporated.



400; Castle Dental Centers, Incorporated.



401; Cato Corporation.



402; Chesapeake Corporation.



403; Children’s Comprehensive Services, Incorporated.



404; CIMA LABS Incorporated.



405; CINAR Corporation.



406; Clearnet Communications Incorporated.



407; ClearWorks.net, Incorporated.



408; CMI Corporation.



409; CMI Corporation.



410; Computer Learning Centers, Incorporated.



411; Covad Communications Group.



412; Cover-All Technologies Incorporated.



413; Cumulus Media Incorporated.



414; Del Global Technologies Corporation.



415; Delphi Financial Group, Incorporated.



416; Detour Magazine, Incorporated.



417; Dicom Imaging Systems, Incorporated.



418; Digital Lava Incorporated.



419; Discovery Laboratories, Incorporated.



420; DocuCorp International.



421; DT Industries, Incorporated.



422; e.spire Communications, Incorporated.



423; EA Engineering, Science, and Technology, Incorporated.



424; ebix.com, Incorporated.



425; ebix.com, Incorporated.



426; EDAP TMS S.A.



427; eMagin Corporation.



428; Environmental Power Corporation.



429; Epicor Software Corporation.



430; eSAT Incorporated.



431; Exide Corporation.



432; FFW Corporation.



433; FinancialWeb.com, Incorporated.



434; First American Financial Corporation.



435; First American Health Concepts, Incorporated.



436; First American Health Concepts, Incorporated.



437; First Tennessee National Corporation.



438; FLIR Systems, Incorporated.



439; Flooring America, Incorporated.



440; FOCUS Enhancements, Incorporated.



441; Gadzoox Networks, Incorporated.



442; Geographics, Incorporated.



443; Geron Corporation.



444; Global Med Technologies, Incorporated.



445; Good Guys, Incorporated.



446; Goody’s Family Clothing, Incorporated.



447; Goody’s Family Clothing, Incorporated.



448; Guess ?, Incorporated.



449; Hamilton Bancorp.



450; Harmonic Incorporated.



451; Hastings Entertainment, Incorporated.



452; Heartland Technology, Incorporated.



453; Hirsch International Corporation.



454; Host Marriott Corporation.



455; IBP, Incorporated.



456; Image Sensing Systems, Incorporated.



457; Imperial Credit Industries.



458; Inacom Corporation.



459; Indus International, Incorporated.



460; Industrial Holdings, Incorporated.



461; Information Management Associates, Incorporated.



462; Innovative Gaming Corporation.



463; Interiors, Incorporated.



464; International Total Services, Incorporated.



465; Internet America, Incorporated.



466; Interplay Entertainment Corporation.



467; Interspeed, Incorporated.



468; Intimate Brands, Incorporated.



469; Intrenet, Incorporated.



470; J. C. Penney Company, Incorporated.



471; JDN Realty Corporation.



472; Jenna Lane, Incorporated.



473; Kitty Hawk Incorporated.



474; Kmart Corporation.



475; Laidlaw Incorporated.



476; LanguageWare.net Limited.



477; Legato Systems, Incorporated.



478; Lernout & Hauspie Speech Products N.V.



479; Lodgian, Incorporated.



480; Louis Dreyfus Natural Gas Corporation.



481; Lucent Technologies, Incorporated.



482; Magellan Health Services, Incorporated.



483; Magna International Incorporated.



484; Master Graphics, Incorporated.



485; MAX Internet Communications Incorporated.



486; Mediconsult.com, Incorporated.



487; Mercator Software, Incorporated.



488; MerchantOnline.com, Incorporated.



489; MetaCreations Corporation.



490; MicroStrategy Incorporated.



491; Mikohn Gaming Corporation.



492; Mitek Systems, Incorporated.



493; MITY Enterprises Incorporated.



494; Monarch Investment Properties, Incorporated.



495; National Fuel Gas Company.



496; Network Systems International, Incorporated.



497; Northeast Indiana Bancorp.



498; Northpoint Communications Group.



499; Nx Networks, Incorporated.



500; Oil-Dri Corporation of America.



501; Omega Worldwide Incorporated.



502; Omni Nutraceuticals, Incorporated.



503; OnHealth Network Company.



504; On-Point Technology Systems Incorporated.



505; Orbital Sciences Corporation.



506; Oriental Financial Group Incorporated.



507; Pacific Bank.



508; Pacific Gateway Exchange, Incorporated.



509; Parexel International Corporation.



510; Paulson Capital Corporation.



511; Phoenix International, Incorporated.



512; Plains All American Pipeline, L.P.



513; Plains Resources Incorporated.



514; Planet411.com Incorporated.



515; Potlatch Corporation.



516; Precept Business Service, Incorporated.



517; Profit Recovery Group International, Incorporated.



518; Pulaski Financial Corporation.



519; Quintus Corporation.



520; Ramp Networks, Incorporated.



521; RAVISENT Technologies Incorporated.



522; Raytheon Corporation.



523; Rentrak Corporation.



524; Rent-Way, Incorporated.



525; RFS Hotel Investors, Incorporated.



526; Roanoke Electric Steel Corporation.



527; Safety Kleen Corporation.



528; SatCon Technology Corporation.



529; Scan-Optics, Incorporated.



530; SCB Computer Technology, Incorporated.



531; Seaboard Corporation.



532; Segue Software, Incorporated.



533; Serologicals Corporation.



534; Shuffle Master, Incorporated.



535; Source Media, Incorporated.



536; Southwall Technologies, Incorporated.



537; Sport-Haley, Incorporated.



538; Sterling Financial Corporation.



539; Stryker Corporation.



540; SunStar Healthcare, Incorporated.



541; Superconductive Components, Incorporated.



542; Sykes Enterprises, Incorporated.



543; Sykes Enterprises, Incorporated.



544; Taubman Centers, Incorporated.



545; TeleHubLink Corporation.



546; Telemonde, Incorporated.



547; Telescan, Incorporated.



548; Telxon Corporation.



549; The Limited, Incorporated.



550; Thomas & Betts Corporation.



551; TJX Companies, Incorporated.



552; Today’s Man, Incorporated.



553; Too, Incorporated.



554; Transport Corporation of America, Incorporated.



555; Travel Dynamics Incorporated.



556; TREEV, Incorporated.



557; Tyco International Limited.



558; UICI.



559; Ultimate Electronics, Incorporated.



560; Unify Corporation.



561; Vari-L Company, Incorporated.



562; Vari-L Company, Incorporated.



563; Vertex Industries, Incorporated.



564; W.R. Grace & Company.



565; Westmark Group Holdings, Incorporated.



566; Whitney Information Network, Incorporated.



567; Winnebago Industries, Incorporated.



568; WorldWide Web NetworX Corporation.



569; Wyant Corporation.



2001;



570; Accelerated Networks, Incorporated.



571; The Ackerley Group, Incorporated.



572; Actuant Corporation.



573; Adaptive Broadband Corporation.



574; Advanced Remote Communication Solutions Incorporated.



575; Air Canada Incorporated.



576; Alcoa Incorporated.



577; ALZA Corporation.



578; AMC Entertainment, Incorporated.



579; American HomePatient, Incorporated.



580; American Physicians Service Group, Incorporated.



581; Anchor Gaming.



582; Andrew Corporation.



583; Angiotech Pharmaceuticals, Incorporated.



584; Anika Therapeutics Incorporated.



585; Applied Materials, Incorporated.



586; Argosy Education Group, Incorporated.



587; ARI Network Services, Incorporated.



588; Aronex Pharmaceuticals, Incorporated.



589; Atchison Casting Corporation.



590; Aviron.



591; Avnet, Incorporated.



592; Avon Products, Incorporated.



593; BakBone Software Incorporated.



594; Baldor Electric Company.



595; Banner Corporation.



596; Beyond.com Corporation.



597; Brightpoint, Incorporated.



598; BroadVision, Incorporated.



599; Bull Run Corporation.



600; California Amplifier, Incorporated.



601; Cambior Incorporated.



602; Campbell Soup Company.



603; Cantel Medical Corporation.



604; Cardiac Pathways Corporation.



605; Cardiac Pathways Corporation.



606; CellStar Corporation.



607; CellStar Corporation.



608; Centennial Communications Corporation.



609; Centex Construction Products, Incorporated.



610; Centex Corporation.



611; Century Business Services, Incorporated.



612; Charming Shoppes, Incorporated.



613; Cheap Tickets, Incorporated.



614; Checkpoint Systems, Incorporated.



615; Chromaline Corporation.



616; Chronimed, Incorporated.



617; Cincinnati Financial Corporation.



618; Clorox Company.



619; Cohesion Technologies, Incorporated.



620; Cohu, Incorporated.



621; Commtouch Software Limited.



622; ConAgra Foods, Incorporated.



623; Concord Camera Corporation.



624; Corel Corporation.



625; Corixa Corporation.



626; Credence Systems Corporation.



627; Critical Path, Incorporated.



628; Cyber Merchants Exchange, Incorporated.



629; Daw Technologies, Incorporated.



630; Dean Foods Company.



631; Derma Sciences, Incorporated.



632; Dial-Thru International Corporation.



633; Digital Insight Corporation.



634; Dillard’s, Incorporated.



635; Dollar General Corporation.



636; Donnelly Corporation.



637; ECI Telecom Limited.



638; ECI Telecom Limited.



639; EGames, Incorporated.



640; Embrex Incorporated.



641; Encad Incorporated.



642; Energy West, Incorporated.



643; Enron Corporation.



644; ESPS, Incorporated.



645; FindWhat.com.



646; First Data Corporation.



647; Fleming Companies, Incorporated.



648; FLIR Systems, Incorporated.



649; Fortune Brands, Incorporated.



650; FreeMarkets, Incorporated.



651; Gateway, Incorporated.



652; GATX Corporation.



653; Genentech, Incorporated.



654; Greka Energy Corporation.



655; Guardian International, Incorporated.



656; Guess ?, Incorporated.



657; HALO Industries Incorporated.



658; Hamilton Bancorp.



659; Hanover Compressor Company.



660; Harrah’s Entertainment Incorporated.



661; Harrah’s Entertainment Incorporated.



662; Hayes Lemmerz International, Incorporated.



663; Health Care Property Investors, Incorporated.



664; Health Grades, Incorporated.



665; Health Risk Management, Incorporated.



666; Hemispherx Biopharma, Incorporated.



667; Herman Miller, Incorporated.



668; Hewlett-Packard Company.



669; High Speed Net Solutions, Incorporated.



670; Hollywood Casino Corporation.



671; Homestake Mining Company.



672; Homestore.com, Incorporated.



673; IBP, Incorporated.



674; ICNB Financial Corporation.



675; IDEC Pharmaceuticals Corporation.



676; IMAX Corporation.



677; Immune Response Corporation.



678; Industrial Distribution Group, Incorporated.



679; Integrated Measurement Systems, Incorporated.



680; Israel Land Development Company.



681; J Jill Group, Incorporated.



682; JDS Uniphase Corporation.



683; Jones Lang LaSalle Incorporated.



684; Kaneb Services, Incorporated.



685; KCS Energy, Incorporated.



686; Kennametal Incorporated.



687; Kindred Healthcare, Incorporated.



688; Krispy Kreme Doughnuts, Incorporated.



689; Kroger Company.



690; Lafarge North America Incorporated.



691; Laidlaw Incorporated.



692; Lancaster Colony Corporation.



693; Lance Incorporated.



694; Landec Corporation.



695; Lands’ End, Incorporated.



696; Lason Incorporated.



697; Learn2, Incorporated.



698; LeCroy Corporation.



699; Ledger Capital Corporation.



700; Lions Gate Entertainment Corporation.



701; LoJack Corporation.



702; Lucent Technologies Incorporated.



703; Lufkin Industries, Incorporated.



704; Magna International Incorporated.



705; Manitowoc Company, Incorporated.



706; Marlton Technologies, Incorporated.



707; MasTec Incorporated.



708; MCK Communications, Incorporated.



709; MERANT PLC.



710; META Group Incorporated.



711; Method Products Corporation.



712; Midland Company.



713; Minuteman International, Incorporated.



714; Monsanto Company.



715; Motor Club of America.



716; National Commerce Financial Corporation.



717; National Steel Corporation.



718; NCI Building Systems, Incorporated.



719; NESCO, Incorporated.



720; Net4Music Incorporated.



721; NetEase.com, Incorporated.



722; New England Business Service, Incorporated.



723; NexPub, Incorporated.



724; NextPath Technologies, Incorporated.



725; Nice Systems Limited.



726; Northrop Grumman Corporation.



727; NPS Pharmaceuticals, Incorporated.



728; Online Resources Corporation.



729; Onyx Software Corporation.



730; Opal Technologies, Incorporated.



731; Orthodontic Centers of America, Incorporated.



732; Parallel Petroleum Corporation.



733; Paulson Capital Corporation.



734; Pennzoil-Quaker State Company.



735; Pinnacle Holdings, Incorporated.



736; Placer Dome Incorporated.



737; PlanetCAD, Incorporated.



738; Pre-Paid Legal Services, Incorporated.



739; Pre-Paid Legal Services, Incorporated.



740; Private Media Group, Incorporated.



741; Provident Bankshares.



742; Proxim, Incorporated.



743; PurchasePro.com, Incorporated.



744; PXRE Group Limited.



745; Rare Medium Group, Incorporated.



746; Rayovac Corporation.



747; Reader’s Digest Association, Incorporated.



748; Reynolds and Reynolds Company.



749; Riviana Foods Incorporated.



750; Roadhouse Grill, Incorporated.



751; Robotic Vision Systems, Incorporated.



752; Rock-Tenn Company.



753; SCB Computer Technology, Incorporated.



754; SeaView Video Technology, Incorporated.



755; Semitool, Incorporated.



756; Service Corporation International.



757; Shurgard Storage Centers, Incorporated.



758; Sonus Corporation.



759; Sony Corporation.



760; Southern Union Company.



761; Southwest Securities Group, Incorporated.



762; SRI/Surgical Express, Incorporated.



763; StarMedia Network, Incorporated.



764; Stolt-Nielsen S.A.



765; Sykes Enterprises, Incorporated.



766; Take-Two Interactive Incorporated.



767; Team Communications Group, Incorporated.



768; TeleCorp PCS, Incorporated.



769; Toro Company.



770; Trikon Technologies, Incorporated.



771; True North Communications Incorporated.



772; Tyco International Limited.



773; U.S. Aggregates, Incorporated.



774; U.S. Wireless Corporation.



775; Unify Corporation.



776; Urban Outfitters, Incorporated.



777; UTStarcom, Incorporated.



778; Vans, Incorporated.



779; Varian, Incorporated.



780; VIA NET.WORKS, Incorporated.



781; Vical Incorporated.



782; Vicon Fiber Optics Corporation.



783; Wackenhut Corporation.



784; Wackenhut Corporation.



785; Wallace Computer Services, Incorporated.



786; Warnaco Group, Incorporated.



787; Warnaco Group, Incorporated.



788; Webb Interactive Services, Incorporated.



789; Western Digital Corporation.



790; Westfield America, Incorporated.



791; Westvaco Corporation.



792; Williams Controls, Incorporated.



793; Woodhead Industries, Incorporated.



794; Xerox Corporation.



2002;



795; ACTV, Incorporated.



796; Adelphia Communications Corporation.



797; Advanced Magnetics, Incorporated.



798; Advanced Remote Communication Solutions Incorporated.



799; Akorn Incorporated.



800; Alliant Energy Corporation.



801; Allied Irish Banks PLC.



802; Almost Family, Incorporated.



803; American Physicians Service Group, Incorporated.



804; Anadarko Petroleum Corporation.



805; Avanex Corporation.



806; AvantGo, Incorporated.



807; Avista Corporation.



808; Baltimore Technologies PLC.



809; Barrett Business Services, Incorporated.



810; BroadVision, Incorporated.



811; Calpine Corporation.



812; CIT Group Incorporated.



813; CMS Energy Corporation.



814; Cognos, Incorporated.



815; Collins & Aikman Corporation.



816; Computer Associates International, Incorporated.



817; Cornell Companies.



818; Corrpro Companies, Incorporated.



819; Cost-U-Less, Incorporated.



820; Creo Incorporated.



821; Del Global Technologies Corporation.



822; Del Monte Foods Company.



823; Dillard’s, Incorporated.



824; DOV Pharmaceutical, Incorporated.



825; Dover Corporation.



826; Drexler Technology Corporation.



827; DuPont Company.



828; Eagle Building Technologies, Incorporated.



829; eDiets.com, Incorporated.



830; Edison Schools Incorporated.



831; eFunds Corporation.



832; Eidos PLC.



833; Enterasys Network, Incorporated.



834; EOTT Energy Partners, L.P. .



835; Escalon Medical Corporation.



836; Exelon Corporation.



837; FFP Marketing Company, Incorporated.



838; FiberNet Telecom Group, Incorporated.



839; Fields Technologies, Incorporated.



840; Flagstar Bancorp, Incorporated.



841; FloridaFirst Bancorp, Incorporated.



842; Flow International Corporation.



843; Foamex International.



844; Foster Wheeler Limited.



845; Gemstar-TV Guide International, Incorporated.



846; GenCorp Incorporated.



847; Gerber Scientific, Incorporated.



848; Great Pee Dee Bancorp, Incorporated.



849; Haemonetics Corporation.



850; Hanover Compressor Company.



851; Hanover Compressor Company.



852; Hometown Auto Retailers Incorporated.



853; HPSC, Incorporated.



854; Hub Group, Incorporated.



855; I/Omagic Corporation.



856; iGo Corporation.



857; ImmunoGen, Incorporated.



858; Imperial Tobacco Group PLC.



859; Input/Output, Incorporated.



860; JNI Corporation.



861; Key Production Company, Incorporated.



862; Kmart Corporation.



863; Kraft Foods Incorporated.



864; L90, Incorporated.



865; Lantronix, Incorporated.



866; Measurement Specialties, Incorporated.



867; Medis Technologies, Limited.



868; Metromedia Fiber Network, Incorporated.



869; Minuteman International, Incorporated.



870; Monsanto Company.



871; Network Associates, Incorporated.



872; Northwest Bancorp, Incorporated.



873; NuWay Energy Incorporated.



874; NVIDIA Corporation.



875; Omega Protein Corporation.



876; OneSource Technologies, Incorporated.



877; PAB Bankshares Incorporated.



878; Pennzoil-Quaker State Company.



879; Peregrine Systems, Incorporated.



880; Peregrine Systems, Incorporated.



881; Performance Food Group Company.



882; Petroleum Geo-Services ASA.



883; PG&E Corporation.



884; Pharamaceutical Resources, Incorporated.



885; Phar-Mor, Incorporated.



886; Phillips Petroleum Company.



887; Photon Dynamics, Incorporated.



888; The PNC Financial Services Group, Incorporated.



889; The PNC Financial Services Group, Incorporated.



890; Pyramid Breweries Incorporated.



891; Qiao Xing Universal Telephone, Incorporated.



892; Raining Data Corporation.



893; Reliant Energy, Incorporated.



894; Reliant Resources, Incorporated.



895; Reliant Resources, Incorporated.



896; Restoration Hardware, Incorporated.



897; Rotonics Manufacturing Incorporated.



898; SeaView Video Technology, Incorporated.



899; Seitel, Incorporated.



900; Smart & Final Incorporated.



901; Standard Commerical Corporation.



902; Star Buffet, Incorporated.



903; Stratus Properties Incorporated.



904; Superior Financial Corporation.



905; Supervalu Incorporated.



906; Sybron Dental Specialties, Incorporated.



907; The Hain Celestial Group, Incorporated.



908; Transmation, Incorporated.



909; United Pan-Europe Communications N.V.



910; United States Lime & Minerals, Incorporated.



911; Univision Communications Incorporated.



912; USABancShares.com, Incorporated.



913; Vail Resorts, Incorporated.



914; Viad Corporation.



915; Williams-Sonoma Incorporated.



916; WorldCom, Incorporated.



917; Xerox Corporation.



918; Xplore Technologies Corporation.



919; Zapata Corporation.



Source: GAO staff analysis of various documents.



[End of section]



Appendix IV: Case Study Overview:



Our objective in reviewing individual restatements was to provide 

detailed information on selected areas for 16 companies.[Footnote 101] 

The purpose of this appendix is to explain how each case study is 

structured and what information is being provided. Specifically, each 

of the cases discussed in appendixes V through XX provides information 

on (1) the company’s operations; (2) the chronology of the restatement, 

including who initiated the restatement; (3) the company’s independent 

auditor; (4) the market’s reaction to the restatement; (5) securities 

analysts’ recommendations; (6) the relevant credit ratings of the 

company’s debts; and (7) legal and/or regulatory actions were taken 

against the company, its executives, directors, independent auditors or 

others. The 16 companies are listed in table 8.



Table 8: Case Studies:



Appendix V; Company: Adelphia Communications Corporation.



Appendix VI; Company: Aurora Foods Inc.



Appendix VII; Company: Critical Path, Inc.



Appendix VIII; Company: Enron Corporation.



Appendix IX; Company: Hayes Lemmerz International, Inc.



Appendix X; Company: JDS Uniphase Corporation.



Appendix XI; Company: MicroStrategy Incorporated.



Appendix XII; Company: Orbital Sciences Corporation.



Appendix XIII; Company: Rite Aid Corporation.



Appendix XIV; Company: Safety-Kleen Corporation.



Appendix XV; Company: SeaView Video Technology, Inc.



Appendix XVI; Company: Shurgard Storage Centers, Inc.



Appendix XVII; Company: Sunbeam Corporation.



Appendix XVIII; Company: Thomas & Betts Corporation.



Appendix XIX; Company: Waste Management, Inc.



Appendix XX; Company: Xerox Corporation.



Source: GAO.



[End of table]



Our analysis was based on only publicly available information, 

including company press releases and filings with the Securities and 

Exchange Commission (SEC) (for example, Forms 10-K, 10-Q, and 8-K); SEC 

press releases, complaints, and settlement agreements; public 

Department of Justice documents; analysts’ recommendations; credit 

agency ratings; historical company rating information maintained by 

research sources; newspaper articles; and congressional testimonies. 

Although we did not interview the company officials to obtain 

information about the restatements, we requested comments on the case 

studies from each of the 16 companies and incorporated any technical 

comments received, as appropriate.



Business Overview:



Each case begins with an overview of the business in which the company 

engages and generally provides information on its size (total revenue) 

and number of employees.



Restatement Data:



Each of the companies restated its financial statements at least once 

from 1997 to 2002, and this section discusses the nature of the 

misstated information and the resulting restatement decision by the 

company’s management. We also included previously reported or announced 

financial results and the revised or restated financial data for 

selected information such as revenue and net income (losses). Finally, 

we also identified those companies that announced a restatement but 

have not yet filed restated financial statements with SEC.



Accounting/Auditing Firm:



This section provides information on the independent auditor of record 

during the restatement period and whether the restating company changed 

its auditor before, during, or after the restatement. We also provide 

information on civil and criminal actions taken against the auditors.



Stock Prices:



To illustrate the impact of a restatement announcement on a company’s 

stock price, we provide selected historical closing stock price 

information for each company. We also discuss how stock prices were 

impacted in the days surrounding the restatement announcement and 

discuss other events that may have positively or adversely impacted the 

company’s stock price. In many of the cases, the company had lost a 

significant amount of its stock value before the restatement 

announcement. Often it had already missed an earnings target or 

announced an internal investigation.



Securities Analysts’ Recommendations:



Given the criticism that many securities analysts have faced about 

their optimistic ratings of companies in the face of adverse financial 

results and condition, we were asked to focus on the role played by 

analysts in recommending securities. Therefore, in this section we 

provide historical information on securities analysts’ ratings in the 

months leading up to and after financial statement restatements and 

other announcements about the financial condition of the covered 

(researched) company. We found no single authoritative source for 

historical analyst recommendations and relied on a variety of sources 

for this data such as Yahoo!Finance and CNET Investor.



Analysts use different rating systems and a variety of terms, including 

strong buy, buy, near-term or long-term accumulate, near-term or long-

term over-perform or under-perform, neutral, hold, reduce, sell, and 

strong sell. Critics often point to the large disparity between 

analysts’ buy recommendations and sell recommendations (the latter made 

up less than 2 percent in 2000). However, the terms have been 

criticized as being misleading because “hold” may mean that investors 

should sell the stock versus holding it. Although we do not attempt to 

determine the definition of each term for each firm, we provide the 

recommendations because they illustrate the range of rating systems 

that analysts use. We generally focused on changes in ratings around 

certain key dates to provide some indication of what signals analysts 

were sending to the markets.



Credit Rating Agency Actions Taken:



Like analysts, credit rating agencies have been questioned about the 

quality of the information they provide, and this scrutiny heightened 

after the rapid failure of Enron. To determine the information credit 

rating agencies were providing to the market about the condition of 

these companies, we collected credit rating information on companies 

when such information was available. Once again we focused on changes 

in ratings around certain key dates, such as the restatement 

announcement date, the actual restatement date, and announcements of 

internal investigations, and bankruptcy filings.



Legal and Regulatory Actions Taken:



To determine the legal and regulatory actions taken, we searched for 

evidence of any lawsuits and whether SEC and or the Department of 

Justice had taken any action in connection with the restatement of a 

company’s financial results. We found that many of the cases led to 

shareholder lawsuits and that SEC and in some cases the Department of 

Justice had taken action against the company, its officials, and its 

independent auditor.



[End of section]



Appendix V: Adelphia Communications Corporation:



Business Overview:



Adelphia Communications Corporation (Adelphia) provides entertainment 

and communication services, including high-speed Internet services, 

cable entertainment, digital cable, long distance telephone services, 

home security, and messaging. Telecommunications services and equipment 

accounted for 77 percent of 2000 revenues; advertising and other 

services, 14 percent; and premium programming, 9 percent.



In June 2002, Adelphia and more than 200 of its subsidiaries and 

partnerships and joint ventures in which it holds at least 50 percent 

ownership interest filed for Chapter 11 bankruptcy protection under the 

federal bankruptcy code.



Restatement Data:



On March 27, 2002, Adelphia announced its fourth quarter and 2001 

results of operations, which included for the first time, the existence 

of certain previously unreported off-balance sheet liabilities. 

According to company and Securities and Exchange Commission (SEC or 

Commission) documents, in March 2002, Adelphia’s board of directors 

appointed a Special Committee of Independent Directors (Special 

Committee) to review business relationships between the company and 

certain affiliates. As part of that review, the Special Committee 

identified accounting and disclosure issues, some of which raised 

questions about whether the company’s management had engaged in 

improper activities. Based on the preliminary results of the 

investigation, management of the company decided to make certain 

adjustments to (1) its results of operations for 2000 and 2001, (2) its 

guidance with respect to management’s earnings expectations for 2002, 

and (3) certain previous public statements regarding the number of 

subscribers to the company’s cable television systems.



On May 2, 2002, Adelphia announced that it had reached a tentative 

conclusion regarding the accounting treatment of certain “co-borrowing” 

agreements, which Adelphia expects to result in the restatement of its 

previously issued financial statements for 1999, 2000, and interim 

financial statements for 2001 (table 9). The tentative conclusions are 

subject to the completion of its annual audit. However, the company 

estimated that the restatement would increase by about $2.6 billion, as 

of December 31, 2001, to reflect the full amount of principal 

borrowings by certain co-borrowing arrangements for which subsidiaries 

of the company are jointly and severally liable.



Table 9: Selected Financial Data, 1999-2001:



Dollars in millions;



Consolidated revenues, as reported; Fiscal Year 1999, $1,288; Fiscal 

Year 2000, $2,608; Fiscal Year 2001, $3,580.



Consolidated revenues, estimated restatement; Fiscal Year 1999, 

N/A; Fiscal Year 2000, 2,548; Fiscal Year 2001, 3,510.



EBITDA, as reported; Fiscal Year 1999, Unavailable; Fiscal Year

2000, 1,202; Fiscal Year 2001, 1,409.



EBITDA, estimated restatement; Fiscal Year 1999, N/A; Fiscal Year

2000, 1,042; Fiscal Year 2001, 1,199.



Note 1: EBITDA means earnings before interest, taxes, depreciation, and 

amortization. To date, Adelphia has not filed its 2001 Form 10-K or 

amended Form 10-Ks for 1999 or 2000.:



Note 2: N/A means not applicable.



Source: SEC filings.



[End of table]



Current management took control in May 2002 and has retained new 

independent auditors and begun the preparation of new financial 

statements. According to Adelphia’s August 20, 2002, amended Form 8-K 

filed with SEC, the company has not filed its quarterly or annual 

filings with SEC but still expects to restate its financial statements 

for the years ended December 31, 1999, and 2000, and its interim 

financial statements for 2001 and possibly other periods. In addition, 

current management believes that the public information provided by 

prior management on other matters of interest to investors, such as the 

percentage of the company’s cable television systems that the company 

believes have been upgraded to current standards, was unreliable. As a 

result, the company anticipates that it may have to supplement the 

financial and certain other information and that such supplemental 

information may be material.



Accounting/Audit Firm:



Deloitte & Touche LLP (Deloitte) was the independent auditor during the 

relevant period. According to Adelphia’s filing with SEC, on May 14, 

2002, Deloitte advised Adelphia that it had suspended its audit of the 

financial statements of the company for the year ended December 31, 

2001. According to Adelphia’s Form 8-K (amendment no. 3), Deloitte’s 

1999 and 2000 reports on Adelphia’s financial statements contained no 

adverse opinion or disclaimer of opinion and were not qualified or 

modified as to uncertainty, audit scope or accounting principles. 

However, according to SEC’s complaint against Adelphia and certain 

individuals, Deloitte had advised Adelphia to disclose the existence of 

several off-balance-sheet liabilities in a footnote disclosure but 

relented when management did not accept the advice. On June 9, 2002, 

Adelphia terminated Deloitte as its independent auditor. On June 13, 

2002, the company retained PricewaterhouseCoopers LLP (PwC) as its new 

independent accountant. As of August 20, 2002, PwC was still in the 

process of completing its audit of Adelphia.



Stock Price:



The company’s common stock was traded on the National Association of 

Securities Dealers Automated Quotation (Nasdaq) under the ticker symbol 

ADLAC. On April 18, 2002, Adelphia announced that it received a Nasdaq 

Staff Determination Letter on April 17, 2002, indicating that it did 

not comply with Marketplace Rule 4310(c)(14) for failing to timely file 

with the SEC its annual report on Form 10-K for the year ended December 

31, 2001. Accordingly, its securities were subject to delisting from 

the Nasdaq Stock Market. Nasdaq suspended trading in Adelphia’s shares 

on May 14, 2002, and subsequently delisted Adelphia’s stock on June 3, 

2002. The company now trades over-the-counter under the ticker symbol 

ADELQ. Although we were unable to compile comprehensive daily stock 

price information for Adelphia after trading in its stock was suspended 

on Nasdaq, we found in the days surrounding Adelphia’s March 26, 2002, 

announcement of its fourth quarter and year end 2001 results, which 

included previously unreported off-balance sheet liabilities, the price 

of Adelphia’s stock fell over 20 percent from a closing price of $20.39 

per share before the announcement to $14.90 the day after the 

announcement (fig.12). It stock continued to trend downward in April 

and by May 1, 2002, the day before Adelphia announced that it would 

likely restate its financial statements for 2000 and 2001, its stock 

price fell almost 13 percent from $6.95 the day before to $6.05 the day 

after.



Figure 12: Daily Stock Prices for Adelphia, December 1, 2001-May 14, 

2002:



[See PDF for image]



Source: GAO’s analysis of New York Stock Exchange Trade and Quote data.



[End of figure]



Securities Analysts’ Recommendations:



Based on historically available securities analysts’ recommendations we 

were able to identify around the time of Adelphia’s restatement 

announcement and discovery of widespread problems, we found information 

on three firms that researched the company. All three firms lowered 

their recommendations during May 2002 following Adelphia’s announcement 

of restatement and tentative restated results. Only one of the three 

recommended avoiding the stock, another recommended holding it, and the 

last firm rated Adelphia as underweight.



Credit Rating Agency Actions:



Adelphia’s debt is rated by Moody’s Investors Service, Inc. (Moody’s) 

and Standard and Poor’s. On January 22, 2002, Moody’s announced that it 

had concluded its review of Adelphia and confirmed its bond ratings, 

and rated the company’s outlook as stable. On March 27, 2002, the day 

Adelphia announced its 2001 results, which included information on off-

balance sheet debt that had not previously been reported, Moody’s 

announced that it had initiated a review of Adelphia and that its 

ratings remained under review for a possible downgrade. On April 8, and 

again on April 22, 2002, Standard and Poor’s downgraded Adelphia’s 

debt. On May 6, 2002, following its announcement of changes in certain 

accounting practices and the likely restatement of its 1999, 2000, and 

interim 2001 financial reports, Moody’s downgraded Adelphia’s ratings 

and stated that they remained under review for further downgrade. On 

May 15, 2002, the date Adelphia announced that it had failed to make 

interest payments on outstanding debt securities and certain preferred 

stock, Moody’s and Standard and Poor’s downgraded Adelphia further and 

Moody’s kept it under review for possible additional downgrades. On May 

20, 2002, Standard and Poor’s downgraded the debt even further, 

indicating that Adelphia had failed to pay at least one or more of its 

financial obligations when it came due. On June 5, 2002, Moody’s issued 

an opinion update and adjusted its ratings of Adelphia to reflect 

recovery values pending the expected bankruptcy filing, which was 

subsequently filed on June 25.



Legal and Regulatory Actions Taken:



More than two dozen shareholder class-action lawsuits have been filed 

against Adelphia, alleging that the Rigas family violated Section 10(b) 

and 20(a) of the Securities Exchange Act of 1934 (Exchange Act), by 

issuing materially false and misleading statements and omitting 

material information regarding the company and its business operations. 

For example, as alleged in the complaint, defendants concealed 

borrowings, understated the company’s debt levels, and failed to 

adequately disclose the existence of billions of dollars of off-balance 

sheet debt.



On June 24, 2002, Adelphia announced that it had filed suit against 

John Rigas, the Company’s founder and former chairman; his sons--Tim, 

Michael, and James Rigas--who are former board members and company 

executives; Peter Venetis his son-in-law, who was a member of the board 

at the company; James Brown, former vice president of finance, and 

Michael Mulcahey, former assistant treasurer. Also named in the lawsuit 

were Doris Rigas, wife of John Rigas; Ellen Rigas Venetis, daughter of 

John Rigas; and 20 companies controlled by the family. The lawsuit 

charges the defendants with violation of the Racketeer Influenced and 

Corrupt Organizations (RICO) Act, breach of fiduciary duties, waste of 

corporate assets, abuse of control, breach of contract, unjust 

enrichment, fraudulent conveyance, and conversion of corporate assets.



On June 25, 2002, Adelphia and more than 200 of its subsidiaries and 

partnerships and joint ventures in which it holds at least 50 percent 

ownership interest collectively filed voluntary petitions under Chapter 

11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the 

Southern District of New York.[Footnote 102]



On July 24, 2002, SEC filed suit in the U.S. District Court for the 

Southern District of New York charging Adelphia and several individuals 

“in one of the most extensive financial frauds ever to take place at a 

public company.” The complaint alleges that between mid-1999 and the 

end of 2001, Adelphia fraudulently excluded from its annual and 

quarterly consolidated financial statements over $2 billion in debt by 

systematically recording those liabilities on the books of 

unconsolidated affiliates, which violated generally accepted 

accounting principles (GAAP).



SEC charges that:



Adelphia, at the direction of the individual defendants: (1) 

fraudulently excluded billions of dollars in liabilities from its 

consolidated financial statements by hiding them in off-balance sheet 

affiliates; (2) falsified operation statistics and inflated Adelphia’s 

earnings to meet Wall Street’s expectations; and (3) concealed rampant 

self-dealing by the Rigas family, including the undisclosed use of 

corporate funds for Rigas family stock purchases and the acquisition of 

luxury condominiums in New York and elsewhere. Section 17(a) of the 

Securities Act of 1933 (Securities Act), 15 U.S.C. § 77q(a), Sections 

10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, 15 

U.S.C. §§ 78j(b), 78m(a), 78m(b)(2)(A) and 78m(b)(2)(B), and Rules 10b-

5, 12b-20, 13a-1, and 13a-13, 17 C.F.R. §§ 240.10b-5, 240.12b-20, 

240.13a-1, and 240.13a-13.



In addition to Adelphia, the complaint charges several individuals with 

numerous securities law violations. Specifically, the Commission’s 

complaint alleges as follows:



* Between mid-1999 and the end of 2001, John J. Rigas, the founder, 

chief executive officer, and chairman of the board until May 15, 2002; 

Timothy J. Rigas, chief financial officer, chief accounting officer, 

treasurer, and board director until May 16, 2002; Michael J. Rigas, 

executive vice president for operations and secretary until May 23, 

2002; James P. Rigas, vice president for strategic planning until May 

23, 2002; and James R. Brown, vice president of finance until May 19, 

2002; with the assistance of Michael C. Mulcahey, vice president and 

assistant treasurer, caused Adelphia to fraudulently exclude from the 

company’s annual and quarterly consolidated financial statements over 

$2.3 billion in bank debt by deliberately shifting those liabilities 

onto the books of Adelphia’s off-balance sheet, unconsolidated 

affiliates. Failure to record this debt violated GAAP requirements and 

laid the foundation for a series of misrepresentations about those 

liabilities by Adelphia and the defendants, including the creation of 

(1) sham transactions backed by fictitious documents to give the false 

appearance that Adelphia had actually repaid debts when, in truth, it 

had simply shifted them to unconsolidated Rigas-controlled entities and 

(2) misleading financial statements by giving the false impression 

through the use of footnotes that liabilities listed in the company’s 

financials included all outstanding bank debt.



* Timothy J. Rigas, Michael J. Rigas, and James R. Brown made repeated 

misstatements in press releases, earnings reports, and Commission 

filings about Adelphia’s performance in the cable industry, by 

inflating (1) Adelphia’s basic cable subscriber numbers; (2) the extent 

of Adelphia’s cable plant “rebuild” or upgrade; and (3) Adelphia’s 

earnings, including its net income and quarterly EBTIDA. Each of these 

represents key “metrics” by which Wall Street evaluates cable 

companies.



* Since at least 1998, Adelphia, through the Rigas family and Mr. 

Brown, made fraudulent misrepresentations and omissions of material 

fact to conceal extensive self-dealing by the Rigas family. Such self-

dealing included the use of Adelphia funds to finance undisclosed open 

market stock purchases by the Rigas family, purchase timber rights to 

land in Pennsylvania, construct a golf club for $12.8 million, pay off 

personal margin loans and other Rigas family debts, and purchase luxury 

condominiums in Colorado, Mexico, and New York City for the Rigas 

family.



The Commission alleges that the defendants continued their fraud even 

after Adelphia acknowledged, on March 27, 2002, that it had excluded 

several billion dollars in liabilities from its balance sheet. The 

defendants allegedly covered-up their conduct and secretly diverted 

$174 million in Adelphia funds to pay personal margin loans of Rigas 

family members.



SEC seeks a final judgment ordering the defendants to account for and 

disgorge all ill-gotten gains including all compensation received 

during the fraud, all property unlawfully taken from Adelphia through 

undisclosed related-party transactions, and any severance payments 

related to their resignations from Adelphia. SEC also seeks civil 

penalties from each defendant; and further, SEC seeks an order barring 

each of the individual defendants from acting as an officer or director 

of a public company.



In conjunction with these civil charges, John Rigas, Timothy Rigas, and 

Michael Rigas were arrested on federal criminal charges of conspiracy 

and securities fraud, wire fraud, and bank fraud. Mr. Brown, Adelphia’s 

former vice president of finance and Mr. Mulcahy, the former director 

of internal reporting, were also arrested on the same charges. All five 

were indicted by a federal grand jury on September 23, 2002. According 

to press reports, prosecutors may file charges against other former 

Adelphia officials.



[End of section]



Appendix VI: Aurora Foods Inc.:



Business Overview:



Aurora Foods Inc. (Aurora) is a producer and marketer of branded food. 

It was incorporated in 1998 as the successor to Aurora Foods Holdings, 

Inc., and its subsidiary AurFoods Operating Company, Inc. Aurora’s 

brands include Duncan Hines, Mrs. Butterworth, Log Cabin, Van de 

Kamp’s, Mrs. Paul’s, Aunt Jemina, Celeste, Chef’s Choice, and Lender’s. 

Its brands are grouped into two general divisions: the dry grocery 

division and the frozen food division. As of December 31, 2001, the 

company had net sales of over $1 billion, and as of February 28, 2002, 

it had about 2,000 employees.



Restatement Data:



During the end of year 1999 audit, Aurora’s independent auditor, 

PricewaterhouseCoopers LLP (PwC), discovered documents that raised 

questions about the company’s accounting practices and informed the 

audit committee of the board of directors of its findings on February 

9, 2000. Two days later, Aurora’s board of directors, after discussion 

with its auditors, formed a special committee to conduct an 

investigation into the company’s application of certain accounting 

policies. The special committee retained legal counsel (Ropes & Gray), 

which hired an independent accounting firm (Deloitte & Touche LLP) to 

assist in the investigation. Through its investigation, the independent 

auditor determined that liabilities that existed for certain trade 

promotion and marketing activities and other expenses (primarily sales 

returns and allowances, distribution and consumer marketing) were not 

properly recognized as liabilities and that certain assets were 

overstated (primarily accounts receivable, inventories, and fixed 

assets). On February 17, 2000, several members of senior management 

resigned including the chairman and chief executive officer (CEO), the 

vice chairman, and chief financial officer (CFO).



On April 3, 2000, Aurora announced restatements of earnings for 1999 

and 1998. Specifically, previously reported pretax earnings would be 

reduced by $43.3 million for the first three quarters of 1999 and by 

$38.3 million for the third and fourth quarters of 1998 (table 10).



Table 10: Selected Financial Data, 1998-1999:



Dollars in thousands;



Pretax earnings, as reported; Third quarter fiscal year 1998: $12,235; 

Fourth quarter fiscal year 1998: $25,698; First quarter fiscal year: 

$12,942; Second quarter fiscal year 1999: $13,146; Third quarter 

fiscal year 1999: $18,045.



Pretax earnings (loss), as restated; Third quarter fiscal year 1998: 

(4,831); Fourth quarter fiscal year 1998: 4,493; First quarter fiscal 

year: 699; Second quarter fiscal year 1999: (5,404); Third quarter 

fiscal year 1999: 5,546.



Source: SEC filings.



[End of table]



Aurora also announced the appointment of a new president and executive 

vice president, both of whom were to join the company’s board of 

directors.



Accounting/Audit Firm:



Aurora’s independent auditor in 1999 was PwC, which audited Aurora’s 

most recent annual financial statements to date.



Stock Price:



Aurora’s stock trades on the New York Stock Exchange (NYSE) under the 

ticker symbol AOR. Prior to its restatement, from November 22, 1999, to 

November 24, 1999, Aurora’s stock price fell over 26 percent on the 

news that its fourth quarter earnings would be hurt by lower profits 

from one of its operations and higher interest expense. On February 1, 

2000, Aurora’s stock price closed at $8.94. In the days surrounding the 

February 11, 2000, creation of a special committee to conduct an 

investigation into the company’s accounting practices, Aurora’s stock 

price fell over 10 percent to $7.06. However, Aurora’s stock fell over 

50 percent from February 17 to February 22, 2000, following the 

announcement that it was investigating its financial practices and that 

several members of its senior management team had resigned. Aurora’s 

stock price remained volatile and trended downward, closing at $3.00 on 

March 31, 2000 (see fig. 13). On April 3, 2000, the day that Aurora 

restated its financial statements, the stock price closed at $3.375, up 

over 12 percent. The stock price moved up over 18 percent on April 4 to 

close at $4.00 per share. Over the three trading days from March 31 

through April 4, Aurora’s stock price increased over 30 percent. The 

stock generally traded between $3 and $5 for the next several months.



Figure 13: Daily Stock Prices for Aurora, October 1, 1999--October 31, 

2000:



[See PDF for image]



Source: GAO’s analysis of NYSE Trade and Quote data.



[End of figure]



Securities Analysts’ Recommendations:



Based on historical securities analyst recommendations that we were 

able to identify, we found historical analyst recommendations from four 

firms that covered Aurora. According to one publicly available history 

of analyst ratings, recommendations for Aurora varied from buy to 

market perform, depending on the analyst. In November 1999, three firms 

downgraded their recommendations on the news that Aurora expected its 

fourth quarter results to be adversely impacted by certain operations 

and expenses. However, none of them recommended a sell. In February 

2000, following news of a delay in filing its financial reports with 

the Securities and Exchange Commission (SEC or Commission) and the 

resignation of several members of senior management (over a month 

before the restatement announcement), one analyst upgraded his 

recommendation from market perform to buy, while another analyst 

downgraded his buy recommendation to a market perform.



Credit Rating Agency Actions:



Aurora’s debt is rated by Moody’s Investors’ Service, Inc. (Moody’s). 

On April 3, 2000, the date of the restatement announcement, Aurora’s 

corporate bond rating indicated that conditions may have existed that 

indicate the inability of the company to pay principal or interest on 

the obligations. This rating was confirmed in May 2000. On February 9, 

2001, Moody’s confirmed Aurora’s rating for senior secured credit 

facility, a mid-range rating indicating that the company’s obligations 

generally lack the characteristics of desirable investments. According 

to this rating, payment of principal and interest or maintenance of 

other contract terms over a long period was in doubt. Although at the 

higher end of the low-grade rating category, Aurora’s senior 

subordinated note rating indicated that there potentially were 

conditions hampering the ability of the company to pay principal or 

interest on its obligations.



Legal and Regulatory Actions Taken:



Aurora was subject to shareholder lawsuits and regulatory action 

related to its accounting practices. As of April 13, 2000, Aurora had 

been served with 13 complaints in class-action lawsuits in the U.S. 

District Court for the Northern District of California. The complaints 

alleged, among other things, that as a result of accounting 

irregularities, the company’s previously issued financial statements 

were materially false and misleading and thus constituted violations of 

federal securities laws. The complaints sought damages in unspecified 

amounts and were brought on behalf of purchasers of the common stock 

during various periods, all of which fell between October 28, 1998, and 

February 18, 2000.



According to company filings, on January 16, 2001, Aurora reached a 

preliminary agreement to settle the securities class-action and 

derivative lawsuits pending against the company and its former 

management team. Under the terms of the agreement, Aurora will pay the 

class members $26 million in cash and $10 million in common stock of 

the company. On March 2, 2001, the company entered into definitive 

agreements with certain members of former management to transfer to the 

company between approximately 3 million and 3.6 million shares of 

common stock of the company, in consideration for a resolution of any 

civil claims that the company may have had, and partially conditioned 

upon future events and circumstances. The cash component of the 

settlement was to be funded entirely by the company’s insurance. As of 

March 23, 2001, with respect to the common stock component of the 

settlement, the stock received from former management would be 

sufficient, at current share prices, to satisfy Aurora’s obligation 

without issuing additional shares. The actual number of shares of 

common stock of the company needed to fund this component was to be 

based on average share prices determined at later dates. However, 

members of the class have the opportunity to opt out of the settlement 

agreement, and bring separate claims against the company. In addition, 

the company has agreed to continue to implement certain remedial 

measures, including the adoption of an audit committee charter, the 

reorganization of the company’s finance department, the establishment 

of an internal audit function and the institution of a compliance 

program, as consideration for resolution of the derivative litigation.



According to company filings within SEC, the staff of SEC and the U.S. 

Attorney for the Southern District of New York also initiated 

investigations relating to the events that resulted in the restatement 

of the company’s financial statements for prior periods. SEC and the 

U.S. Attorney requested that the company provide certain documents 

relating to the company’s historical financial statements. On September 

5, 2000, the company received a subpoena from SEC to produce documents 

in connection with the restatements. SEC also requested certain 

information regarding some of the company’s former officers and 

employees, correspondence with the company’s auditors and documents 

related to financial statements, accounting policies, and certain 

transactions and business arrangements.



On January 23, 2001, the U.S. Attorney announced indictments alleging 

financial accounting fraud against members of former management and 

certain former employees of Aurora. Subsequently, three senior 

officials and one division official pled guilty to the charges. The 

U.S. Attorney did not bring charges against Aurora. In a cooperation 

agreement with the U.S. Attorney, Aurora confirmed that it would 

continue to implement an extensive compliance program, which will 

include an internal audit function, a corporate code of conduct, a 

comprehensive policies and procedures manual, employee training and 

education on policies and procedures, and adequate disciplinary 

mechanisms for violations of policies and procedures. According to an 

Aurora official and various press reports, in 2002, Ms. Laurie 

Cummings, the former CFO, was sentenced to 57 months imprisonment. 

Other officials are scheduled to be sentenced later this year.



In addition, Aurora consented to the entry of an order by SEC requiring 

compliance with requirements for accurate and timely reporting of 

quarterly and annual financial results, and the maintenance of internal 

control procedures in connection with a civil action by SEC concerning 

accounting irregularities at the company in 1998 and 1999. Aurora 

neither admitted nor denied any wrongdoing, and SEC did not seek any 

monetary penalty. Aurora also committed to continue to cooperate with 

SEC in connection with its actions against certain former members of 

management and former employees.



According to SEC’s January 23, 2001, press release, SEC also brought 

securities fraud charges against three former senior officers and four 

employees of Aurora, in connection with a scheme that caused Aurora to 

underreport trade marketing expenses and substantially inflate reported 

earnings in 1998 and 1999. In addition, another former employee was 

charged with corporate reporting and recordkeeping violations. SEC also 

announced that it had simultaneously settled the charges against two of 

the individuals.



The complaint alleges that Aurora’s senior management, consisting of 

Ian R. Wilson, chairman of the board of directors and CEO of Aurora, 

from June 1998 until he resigned on February 17, 2000; Ms. Laurie 

Cummings, CFO of Aurora, from June 1998 until she resigned on February 

17, 2000; and Ray Chung, executive vice president of Aurora, from June 

1998 until he resigned on February 17, 2000, were aware that Aurora was 

not accurately reporting trade marketing expense, which is the expense 

Aurora incurs to induce grocery stores to purchase its products. (For 

example, a case discount or other similar incentive.) Instead of 

properly booking the expense, Mr. Wilson, Ms. Cummings, and Mr. Chung 

allegedly tried to conceal it from the auditors by directing division 

level officers and employees to make false entries in various accounts 

on the company’s books. The effect was to falsely and substantially 

inflate the Aurora’s financial results. The complaint states that the 

result was to materially understate expenses and liabilities on the 

company’s publicly filed financial statements. The object of the scheme 

was to conceal from the investing public the fact that the company had 

not met its earnings targets from quarter to quarter.



The scheme allegedly involved several other employees, including Dirk 

Grizzle, vice-president of finance and principal financial officer of 

Aurora’s Foods division (AFI) until June 2000. The complaint described 

the following events. Sometime in March 1999, Mr. Grizzle and Ms. 

Cummings discussed putting known trade promotion expenses in accounts 

receivable, rather than simply recording them on Aurora’s books. The 

effect would be to conceal these expenses from the auditors. 

Thereafter, on a regular basis, Ms. Cummings and/or Mr. Chung 

instructed Mr. Grizzle to move large portions of the expense to 

accounts receivable. Mr. Grizzle carried out these instructions by 

directing Tammy Fancelli, a senior financial analyst at AFI until 

September 2000, and James Elliott, the manager of customer financial 

services at AFI until September 2000, to make false entries in the 

accounts receivable ledgers and subsidiary ledgers. Beginning in about 

April 1999, Mr. Grizzle also prepared, at least quarterly, two versions 

of AFI’s trade promotions reserve analysis, one for the company’s 

internal use, which showed an ever-growing trade underaccrual, 

consisting primarily of items of actual, known expense, and the others 

to be provided to the auditors, which falsely showed an overaccrued 

position.



The complaint also alleges that at another of the company’s divisions, 

Timothy B. Andersen, the vice-president of finance and principal 

financial officer at Aurora’s Van de Kamp’s division (VDK) until June 

2000, carried out Ms. Cummings’s and Mr. Chung’s instructions to reduce 

expenses on the books to enable Aurora to hit “must make” numbers on a 

quarterly or more frequent basis. In almost every instance, in order to 

hit these earnings targets, Mr. Andersen reduced trade promotion 

expense and the accompanying trade promotion accrual, even though he 

knew that the division had already recorded insufficient trade expense 

and had under-accrued the trade promotion reserve.



According to the SEC complaint, Mr. Andersen allegedly accomplished 

this by directing VDK’s director of budget and planning to reduce the 

trade promotion accrual. Because the division’s computers automatically 

posted accruals to the reserve account as sales were posted, the 

automated entries had to be adjusted manually. However, the complaint 

alleges that Ms. Cummings eventually became concerned that these manual 

entries would draw audit scrutiny and directed Mr. Andersen to turn off 

the automated posting system. Thereafter, all accruals were posted by 

hand at the levels dictated by Ms. Cummings.



The complaint alleges that Ms. Cummings directed VDK’s director of 

budgeting and planning to prepare for the auditors a version of the 

trade reserve analysis employing incorrect assumptions, which, had they 

been disclosed, would have immediately revealed the inadequacy of the 

accruals. Mr. Keith Luechtefeld, the controller at Aurora’s VDK 

division until June 2000, was aware of these deliberate underaccruals, 

and on at least one occasion, carried out Mr. Andersen’s instruction to 

conceal the underaccruals by shifting $2 million from other liability 

accounts on VDK’s books to the trade promotion reserve. These entries 

had no purpose other than to make it appear to the auditors that the 

accrual was adequate, when, in fact, it was not.



Allegedly, throughout 1999, division officers at both AFI and VDK 

regularly informed Aurora CEO, Mr. Wilson, of the substantial trade 

accrual deficit, but Mr. Wilson refused to take action to correct the 

problem and, from time to time, noted his concurrence in actions 

directed by his subordinates Ms. Cummings and Mr. Chung to conceal the 

underaccrual. The complaint alleges that Mr. Wilson also made several 

public statements in 1999 concerning the company’s financial condition, 

which failed to disclose the substantial unrecorded trade marketing 

expense. By January 2000, Mr. Wilson allegedly actively participated in 

efforts to conceal the false accounting entries from the auditors and 

personally directed division employees to lie to the auditors.



Finally, SEC alleges that, as a result, Mr. Wilson, Mr. Chung, Ms. 

Cummings, Mr.Grizzle, Ms. Fancelli, Mr. Andersen and Mr. Luechtefeld 

violated, or aided and abetted violations of, Section 10(b) of the 

Securities Exchange Act of 1934 (Exchange Act), and Rule 10b-5; that 

all of the individual defendants violated Section 13(b)(5) of the 

Exchange Act and Rule 13b2-1 in connection with a financial reporting 

fraud involving Aurora; that Mr. Wilson, Mr. Chung and Ms. Cummings 

also violated Rule 13b2-2 promulgated under the Exchange Act; that 

Aurora violated Sections 13(a) and 13(b)(2) of the Exchange Act and 

Rules 12b-20, 13a-1, and 13a-13; and that Mr. Wilson, Mr. Chung and Ms. 

Cummings, as control persons of Aurora, are liable for Aurora’s 

violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 

12b-20 and 13a-13.



The Commission sought a final judgment (1) permanently enjoining each 

defendant from future violations of the securities laws; (2) ordering 

Mr. Wilson, Mr. Chung, Ms. Cummings and Mr. Grizzle to disgorge 

performance bonuses paid to them on the basis of materially overstated 

earnings, plus prejudgment interest; (3) imposing civil penalties 

against each defendant (except Aurora); and (4) barring Mr. Wilson, Mr. 

Chung, Ms. Cummings, and Mr. Grizzle from serving as an officer or 

director of a public company.



The company has consented to a permanent injunction from further 

violations of the reporting and internal control provisions of the 

federal securities laws. In addition, Ms. Fancelli consented to a 

permanent injunction from further violations of the antifraud and 

reporting and internal control provisions of the federal securities 

laws that ordered her to pay a civil penalty in the amount of $20,000. 

Likewise, Mr. Elliott consented to a permanent injunction from further 

violations of the reporting and internal control provisions of the 

federal securities laws that ordered him to pay a civil penalty in the 

amount of $10,000. To date, the remaining litigation is pending in the 

U. S. District Court for the Southern District of New York.



[End of section]



Appendix VII: Critical Path, Inc.:



Business Overview:



Critical Path, Inc. (Critical Path), founded in 1997, provides Internet 

messaging and infrastructure products and services. The company 

provides messaging and collaboration services on an outsource basis, 

including wireless, secure, and unified messaging to basic E-mail and 

personal information management, and other identity management 

solutions that simplify user profile management and strengthen 

information security. Critical Path’s customers include more than 700 

enterprises, 190 carriers and service providers, 8 national postal 

authorities, and 35 government agencies. Its primary sources of revenue 

include providing a wide range of messaging and directory products and 

services. As of June 30, 2001, it had 784 employees down from 1,041 

year-end 2000. For the year ended December 2000 and 2001, Critical Path 

had assets totaling $498 million and $200 million, respectively.



Restatement Data:



In 1999, Critical Path reported revenue of $16.1 million. For the first 

quarter of 2000, it reported revenue of $24.6 million. During the next 

quarter revenue increased to $33.5 million, beating analysts’ revenue 

estimates by about $6 million. The company reported a net loss, 

excluding special charges, for the second quarter of $20.2 million but 

again beat consensus earnings per share estimates. Critical Path’s 

chief executive officer (CEO) announced second quarter results on July 

19, 2000, and predicted that for the fourth quarter Critical Path would 

for the first time report a profit excluding special charges. In 

October 2000, Critical Path’s CEO publicly stated that the company was 

increasing its fourth quarter revenue estimate from $54 million to $56 

million and reiterated his earlier prediction that the company would 

earn its first quarterly profit. On November 2, 2000, Critical Path 

issued a press release reiterating that guidance.



In an Administrative Order issued in February 2002, the Securities and 

Exchange Commission (SEC or Commission) found that late in 2000, 

Critical Path took several actions to boost revenue and reduce costs 

before the end of December 2000 in order to announce a profit for the 

fourth quarter as predicted. Specifically, SEC made the following 

findings. In the final week of December 2000 Critical Path’s president 

and vice president of sales concluded that there was no legitimate 

means by which Critical Path could achieve its revenue and earnings 

goals. The president told the vicepresident to get approximately $4 

million in “back-pocket”[Footnote 103] deals and assured the vice 

president of sales that Critical Path could use its bad debt reserve 

to absorb the losses when the purported customers failed to pay.

[Footnote 104]



On January 11, 2001, Critical Path’s president directed Critical Path 

personnel to backdate to December 2000, a $750,000 sale just made to a 

company. In addition, Critical Path planned to recognize a $7 million 

sale to a firm that was formed for this transaction and was owned by a 

group of shareholders who owned a substantial amount of Critical Path 

stock. With revenue from these transactions, Critical Path would beat 

consensus estimates for revenue but not earnings for the quarter. 

However, Critical Path’s finance officer disclosed the backdating of 

the $750,000 contract to the new chief financial officer (CFO), who 

corrected the contract date and did not allow the revenue to be 

recorded in the fourth quarter.



The complaint alleges that on January 17, 2001, Critical Path’s 

independent accountants, PricewaterhouseCoopers LLP (PwC), told the new 

CFO that the company should not record as revenue the $7 million 

transaction with the reseller because in PwC’s view the reseller and 

the business objectives of the transactions lacked substance.



After the market closed on January 18, 2001, Critical Path announced 

unaudited condensed consolidated operating results for the fourth 

quarter and year 2000, “prepared in accordance with generally accepted 

accounting principles,” which included $52 million in revenue and a net 

loss of $11.5 million, excluding special charges. Even though the 

announced results for the fourth quarter were materially overstated, 

they were below analysts’ estimates for both revenue and earnings.



On January 31, 2001, Critical Path’s new CFO learned about the 

misconduct and alerted the company’s board, which held an emergency 

meeting on February 1, 2001. The board took a number of steps, 

including forming a special committee to conduct an investigation and 

placing the company’s president, David A. Thatcher, and vice president 

of sales, Timothy J. Ganley, on administrative leave.



On February 2, 2001, before the market opened, Critical Path issued a 

press release announcing that (1) its board of directors had formed a 

special committee to conduct an investigation into the company’s 

revenue recognition practices, and (2) it now believed that the results 

the company announced on January 18, 2001 might have been materially 

misstated.



On February 15, 2001, the company announced that, based on the 

preliminary results of the special committee investigation, previously 

announced revenues for the fourth quarter of 2000 would decrease by 

$6.5 million to $8 million. Of this amount, Critical Path expected that 

approximately $4.2 million involved transactions that would not result 

in revenue and that the remainder might result in revenue that would be 

recognized during 2001. The company further expected that costs and 

operating expenses for the fourth quarter of 2000 were going to 

increase by $1 million to $2 million. In addition, the revisions would 

cause the company’s net loss for the fourth quarter of 2000, excluding 

special charges, to increase in the range of $19 million to $21.5 

million.



On April 5, 2001, Critical Path filed its Form 10-K with SEC for fiscal 

year 2000. The final revisions were greater than originally estimated 

(table 11). Revenue for the third quarter of 2000 was restated to $35.3 

million (down from $45 million). The net loss was restated to $18.6 

million (up from $8.7 million), excluding special charges. Revenue for 

the fourth quarter was revised to $42.3 million (down from $52.0 

million announced on January 18, 2001). The total net loss was revised 

to $23.3 million, compared with $11.5 million previously announced. 

Likewise, for the year-end, revenue for 2000 was revised to $135.7 

million, down from the previously announced $155 million. Net losses 

were revised to $78.9 million, compared with $57.2 million as 

previously announced.



Table 11: Selected Financial Data, 2000-2001:



Dollars in millions.



Revenue, as reported or announced; Third quarter fiscal year 2000: 

$45.0; Fourth quarter fiscal year 2000: $52.0; Fiscal year 2001: 

$155.0.



Revenue, as restated; Third quarter fiscal year 2000: 35.3; 

Fourth quarter fiscal year 2000: 42.3; Fiscal year 2001: 135.7.



Net income (loss), as reported or announced; Third quarter fiscal 

year 2000: (8.7); Fourth quarter fiscal year 2000: (11.5); Fiscal 

year 2001: 57.2.



Net income (loss), as reported or announced; Third quarter fiscal 

year 2000: (18.6); Fourth quarter fiscal year 2000: (23.3); 

Fiscal year 2001: 78.9.



Note: Critical Path’s restatement involved both reported (third 

quarter) and announced (fourth quarter and fiscal year 2001) results.



Source: SEC filings.



[End of table]



In February 2002, Critical Path announced that it had completed a 

restructuring plan that led to its return to financial stability, 

including a $95 million transaction by new financial partners that 

significantly improved its financial position, bringing in $30 million 

in gross cash proceeds. In its fourth quarter earnings report on 

February 5, 2002, the company said it had shown revenue growth for its 

core Internet communications products for three consecutive quarters, 

and said it expects to achieve positive earnings before interest before 

interest, taxes, depreciation, and amortization (excluding special 

charges) in the fourth quarter of 2002.



Accounting/Audit Firm:



PwC was Critical Path’s independent accountant during the restatement 

period and has been the company’s auditor since at least 1999.



Stock Price:



Critical Path’s common stock trades on the National Association of 

Securities Dealers Automated Quotation (Nasdaq) under the symbol CPTH. 

From April 23, 1999, to September 28, 2001, Critical Path’s closing 

stock price ranged from a high of $116.75 to a low of $0.26. On January 

19, 2001, the day after Critical Path announced that it would not meet 

its fourth quarter earnings projection, Critical Path experienced a 55-

percent loss in market value. On February 2, 2001, before markets 

opened, Critical Path announced the pending investigation and trading 

was suspended pending the release of additional information. Trading 

resumed on February 15, 2001, when Critical Path announced the 

preliminary results of its investigation. As figure 14 illustrates, the 

stock value dropped 70 percent. That is, the stock price closed at 

$10.06 on February 1, 2001, the day before the announcement of the 

investigation, and it closed at $3.06 on February 15, 2001, the day it 

announced the preliminary results. On April 4, 2001, the day before it 

actually restated its earnings, the stock price closed at $1.53; on the 

date of the restatement it closed at $1.53; and the day after it closed 

at $1.06. For this 3-day period the stock dropped 31 percent.



Figure 14: Daily Stock Prices for Critical Path, August 1, 2000-August 

31, 2001:



[See PDF for image]



Source: GAO’s analysis of New York Stock Exchange Trade and Quote data.



[End of figure]



Securities Analysts’ Recommendations:



Based on historical securities analysts recommendations that we were 

able to identify, we found five analysts that covered Critical Path and 

all initiated the stock as a buy or accumulate. Three of the five 

upgraded their ratings later in 1999. In 2000, an additional 14 

analysts initiated coverage of Critical Path; all had generally 

favorable ratings. On November 29, 2000, Critical Path received its 

first downgrade from a strong buy to a buy. However, on January 19, 

2001, the day after Critical Path announced its earnings, which were 

below estimates, 10 analysts downgraded Critical Path. Several other 

firms downgraded their initial recommendations on February 2, 2001, the 

day Critical Path announced that it would have to revise previous 

revenue and loss estimates for the fourth quarter and year-end 2000 and 

that it was launching an investigation into accounting irregularities. 

Two firms downgraded the stock for a second time on February 2, 2001, 

to market perform. One of the two firms made an additional downgrade on 

the stock on February 16, 2001.



Credit Rating Agency Actions:



Standard and Poor’s long-term credit rating for Critical Path’s debt 

indicated that Critical Path’s obligations were more vulnerable to 

nonpayment than higher-rated companies but that it currently had the 

capacity to meet its financial commitment on the obligation. In 

addition, such a rating indicated that adverse business, financial, or 

economic conditions will likely impair Critical Path’s capacity or 

willingness to meet its commitment on the obligation. By May 15, 2001, 

it had been downgraded and was considered “currently vulnerable” and 

dependent on favorable business, financial, and economic conditions to 

meet its commitments. On March 12, 2002, Critical Path was not rated, 

and according to Standard and Poor’s, its future-rating outlook was not 

meaningful.



Legal and Regulatory Actions Taken:



In early 2001, shareholders filed lawsuits against Critical Path to 

recover damages caused by the defendants’ alleged violation of federal 

securities laws. In November 2001, Critical Path settled class-action 

lawsuits brought by shareholders against the company and several of its 

former officers and directors. The settlement provided for $17.5 

million in cash and the issuance of warrants to purchase 850,000 shares 

of Critical Path common stock at an exercise price of $10 per share. 

The cash settlement amount will be covered by the company’s liability 

insurance. Also in November 2001, Critical Path settled related 

derivative action. The derivative litigation settlement provides for 

certain corporate governance changes and the:



payment of plaintiffs’ attorney fees. In a separate matter, on April 3, 

2002, shareholders voluntarily withdrew lawsuits that had been filed in 

February and March of 2002.



In February 2001, SEC issued a formal order of investigation of 

Critical Path and certain unidentified individuals associated with 

Critical Path. The investigation related to accounting matters, 

financial reports, other public disclosures, and trading activity in 

its stock. In February 2002, without admitting or denying SEC’s 

findings, Critical Path consented to an administrative order finding 

that the company violated the periodic reporting, books and records, 

and internal control provisions of the Securities Exchange Act of 1934 

(Exchange Act) and SEC Rule 13a-13.[Footnote 105] The order directs 

Critical Path to cease and desist from committing or causing violations 

of those provisions. SEC did not fine the company.



SEC initiated civil actions against Mr. Thatcher; Mr. Ganley, the vice 

president of sales for Critical Path; William H. Rinehart, the head of 

Critical Path’s North and Latin American sales forces from November 

1998 until February 2001; Jonathan A. Beck, a vice president of sales 

at Critical Path from November 1998 until February 2001; and Kevin P. 

Clark, a regional vice president of sales from November 1998 until 

February 2001. SEC’s investigation in this matter is continuing.



Without admitting or denying SEC’s allegations, Mr. Thatcher consented 

to a final judgment permanently enjoining him from violating antifraud, 

reporting, books and records, and internal control provisions of the 

Exchange Act and SEC rules and from aiding and abetting such 

violations. The court also barred him for 5 years from serving as an 

officer or director of any public company and ordered him to pay a 

civil penalty in the amount of $110,000.



Mr. Ganley was charged with participating in one of the eight back-

pocket transactions, and it was alleged that he then illegally sold 

1,300 shares of Critical Path stock in January 2001 based on 

information he possessed about the fraud and the company’s true 

financial condition. Without admitting or denying SEC’s allegations, 

Mr. Ganley consented to the entry of final judgment permanently 

enjoining him from violating antifraud and books and record provisions 

of the Exchange Act and related SEC rules and from aiding and abetting 

violations of books and records and internal control requirements of 

the Exchange Act. He was also ordered to pay over $105,900 in penalties 

and disgorgement. Specifically, he had to disgorge a $27,950 loss he 

avoided by engaging in insider trading, plus prejudgment interest. Mr. 

Ganley also had to pay a $27,950 civil penalty for insider trading and 

a $50,000 civil penalty for his participation in the fictitious 

transaction that was part of the financial fraud.



Mr. Rinehart was charged with directing his sales force to arrange--and 

in each instance personally participated in--certain transactions for 

which Critical Path improperly recorded revenue of approximately $6.3 

million for the fourth quarter of fiscal 2000. He then falsely stated 

in a letter to Critical Path’s auditors that all of the company’s sales 

were bonafide. Without admitting or denying the Commission’s 

allegations, Mr. Rinehart consented to the entry of final judgments 

permanently enjoining him from violating Sections 10(b) and 13(b)(5) of 

the Exchange Act and Exchange Act Rules 10b-5, 13b2-1 and 13b2-2, and 

from aiding and abetting violations of Sections 13(b)(2)(A) and 

13(b)(2)(B) of the Exchange Act. He was also ordered to pay a $110,000 

civil penalty for his participation in the financial fraud and barred 

from acting as an officer or director of a public company for 5 years.



Mr. Clark was also charged with participating in one of these 

fraudulent transactions, for which Critical Path improperly recorded 

revenue totaling approximately $2.125 million. Mr. Clark, without 

admitting or denying the Commission’s allegations, consented to the 

entry of final judgments permanently enjoining him from violating 

Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 

10b-5, 13b2-1 and 13b2-2, and from aiding and abetting violations of 

Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. He was also 

ordered to disgorge $343,140 plus $35,772 prejudgment interest.



The complaint alleges that Mr. Beck participated on one of the 

fraudulent transactions, for which Critical Path improperly recorded 

revenue totaling about $2.125 million. SEC alleges that Mr. Beck 

violated, or aided and abetted violations of the antifraud, books and 

records, internal accounting controls, and reporting provisions of the 

federal securities laws. The Commission’s complaint further alleges 

that Mr. Beck illegally sold 27,348 shares of Critical Path stock based 

on nonpublic information he possessed about the fraud and the company’s 

true financial condition. By selling shares while the fraud was under 

way, Mr. Beck avoided losses of $586,368. SEC asked the court to 

permanently restrain and enjoin Mr. Beck from violating Sections 10(b) 

and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5 and 13b2-

1, and from aiding and abetting violations of Sections 13(b)(2)(A) and 

13(b)(2)(B) of the Exchange Act. SEC also seeks a civil monetary 

penalty and disgorgement of ill-gotten gains.



SEC also entered an administrative order against David A. Thatcher, the 

president of Critical Path from January 2000 to February 2001 and 

acting CFO from December 6, 2000, to January 3, 2001. Prior to becoming 

president of Critical Path in January 2000, he served as CFO from 

December 1998 to January 2000. In addition, he intermittently served on 

the board of directors since 1997. He was a licensed certified public 

accountant and signed off on Critical Path’s Form 10-Q filed with SEC 

for the first 3 quarters of 1999.



On February 5, 2002, the U.S. Attorney’s Office announced that it had 

filed securities fraud charges against Mr. Thatcher, the former 

president, and the unsealing of insider trading charges against Mr. 

Ganley, the former sales vice president. Mr. Thatcher was charged with 

conspiracy to commit securities fraud in violation of 18 U.S.C. § 371. 

According to the announcement, he and others conspired to improperly 

record and accelerate revenues during the third and fourth quarters of 

2000. On January 12, 2002, Mr. Thatcher pled guilty to the securities 

fraud charges. Specifically, he admitted participation in six 

transactions for which Critical Path improperly recognized revenue 

during the third and fourth quarters of 2000. He faces a maximum 

statutory penalty of 5 years imprisonment, a $250,000 fine, and 3 years 

supervised release. As of September 19, 2002, Mr. Thatcher had not been 

sentenced.



Mr. Ganley, the former sales vice president, was charged with insider 

trading in violation of 15 U.S.C. § 78j(b), 15 U.S.C. § 78ff(a) and 17 

CFR 240.10b-5. According to the January 9, 2002 grand jury indictment, 

he sold Critical Path stock on January 11, 2001, while aware that the 

company was recording false revenues and fraudulently under-recording 

expenses in an ultimately unsuccessful attempt to meet its publicly 

stated goal of profitability during the fourth quarter of 2000. On 

April 10, 2002, he pled guilty to insider-trading charges. He admitted 

that on January 11, 2001, he sold Critical Path stock on the basis of 

material inside information in violations of securities laws. He faced 

a maximum statutory penalty of 10 years imprisonment, a $1 million 

fine, and 3 years supervised release. On September 10, 2002, Mr. Ganley 

was sentenced to 6 months imprisonment, 2 years supervised release with 

a condition of 6 months home detention, and a $100 special assessment.



On August 27, 2002, the U.S. Attorney’s Office for the Northern 

District of California announced criminal charges against Messrs. Beck 

and Clark for insider trading. Both are expected to appear in court 

later in the year.



[End of section]



Appendix VIII: Enron Corporation:



Business Overview:



Enron Corporation (Enron) provides products and services related to 

natural gas, electricity, and communications to wholesale and retail 

customers through subsidiaries and affiliates. Enron’s activities are 

divided into five segments: transportation and distribution, wholesale 

services, retail energy services, broadband services, and other. Enron 

operates in the United States, Canada, Europe, Japan, Australia, South 

America, and India. Wholesale services accounted for 93 percent of 2000 

revenues; retail energy services, 4 percent; transportation and 

distribution, 3 percent; and broadband services and other services, 

less than 1 percent. On December 2, 2001, Enron and 13 of its 

subsidiaries filed for Chapter 11 bankruptcy protection under the 

federal bankruptcy code.



Restatement Data:



On October 16, 2001, Enron announced its third quarter 2001 numbers, a 

net loss of $618 million, which included a $544 million charge 

characterized as a nonrecurring item related to the termination of 

“certain structured finance arrangements” (table 12).[Footnote 106] On 

October 26, 2001, a special committee of Enron’s board of directors 

began a review of transactions between Enron and certain related 

parties. The board hired Wilmer, Cutler & Pickering as its counsel, 

which hired Deloitte & Touche LLP to provide accounting advice.



On November 8, 2001, Enron announced that it would restate earnings for 

the period 1997 through 2001 to reflect (1) recording the previously 

announced $1.2 billion reduction to shareholders’ equity reported by 

Enron in the third quarter of 2001 and (2) various income statement and 

balance sheet adjustments required as the result of a determination by 

Enron and its auditors (which resulted from information made available 

from further review of certain related-party transactions) that three 

unconsolidated entities should have been consolidated in the financial 

statements pursuant to generally accepted accounting principles (GAAP).



Enron, like many other companies, utilized a variety of structured 

financings in the ordinary course of its business to access capital or 

hedge risk.[Footnote 107] Many of these transactions involved special 

purpose entities (SPE).[Footnote 108] Accounting guidelines allowed for 

SPEs to report separately from the sponsoring company’s financial 

statements in certain circumstances, and in other cases the SPEs’ 

financial results should be recorded with the sponsoring company’s 

results.[Footnote 109] Accordingly, certain transactions between the 

sponsoring company and the SPE may result in gains or losses or cash 

flow being recognized by the sponsor, commonly referred to by financial 

institutions as “monetizations.” Enron established several SPEs; most 

notable were Joint Energy Development Investments, L. P. (JEDI); Chewco 

Investments, L.P. (Chewco); LJM Cayman, L.P. (LJM1); and LJM2 Co-

Investment, L.P. (LJM2) referred to collectively as the LJMs.



JEDI was established in 1993 as a partnership between Enron and 

California Public Employees’ Retirement System (Calpers) to invest in 

natural gas projects. In 1997, Enron wanted to expand JEDI, but Calpers 

was reluctant. Andrew Fastow, then chief financial officer (CFO), 

created Chewco, which was setup in 1997 to buy out the interest of 

Calpers investment in JEDI, which was valued at $383 million. The LJMs 

were private investment limited partnerships that were formed in 1999. 

Mr. Fastow was (from inception through July 2001) the managing member 

of the general partners of the LJMs.



Enron restated its financial statements from 1997 through 2000 and the 

first and second quarters of 2001 to (1) reflect the conclusion that 

three entities mentioned above did not meet certain accounting 

requirements and should have been consolidated, (2) reflect the 

adjustment to shareholders’ equity, and (3) include prior-year proposed 

audit adjustments and reclassifications (that were previously 

determined to be immaterial in the year originally proposed).



Specifically, Enron concluded that based on current information the 

financial activities of Chewco, a related party that was an investor in 

JEDI, should have been consolidated beginning in November 1997. The 

financial activities of JEDI, in which Enron was an investor and which 

were consolidated into Enron’s financial statements during the first 

quarter of 2001, should have been consolidated beginning in November 

1997; and the financial activities of a wholly owned subsidiary of 

LJM1, which engaged in transactions with Enron to permit Enron to hedge 

market risks of an equity investment in Rhythms NetConnections, Inc., 

should have been consolidated into Enron’s financial statements 

beginning in 1999.



Enron indicated that the restatement would include a reduction to 

reported net income of approximately $96 million in 1997, $113 million 

in 1998, $250 million in 1999, and $132 million in 2000, and would also 

include increases of $17 million for the first quarter of 2001 and $5 

million for the second quarter, and a reduction of $17 million for the 

third quarter of 2001 (table 12). These changes to net income were the 

result of the retroactive consolidation of JEDI and Chewco (November 

1997), the consolidation of the LJM1 subsidiary for 1999 and 2000 and 

prior year proposed audit adjustments. The consolidation of JEDI and 

Chewco also increased Enron’s debt by approximately $711 million in 

1997, $561 million in 1998, $685 million in 1999, and $628 million in 

2000 (table 12). Enron expected the restatement would have no negative 

impact on its reported earnings for the 9-month period ending September 

2001.



Table 12: Selected Financial Data 1997-2001:



Dollars in millions.



Net income (loss), as reported; Fiscal year 1997: $105; Fiscal year 

1998: $703; Fiscal year 1999: $893; Fiscal year: $979; Dollars 

in millions: First quarter: $425; Second quarter 2001: $404; Third 

quarter 2001: $(618).



Net income (loss), anticipated restatement; Fiscal year 1997: 9; 

Fiscal year 1998: 590; Dollars in millions: Fiscal year 1999: 643; 

Fiscal year: 847; First quarter: 442; Second quarter 2001: 409; Third 

quarter 2001: (635).



Debt, as reported; Fiscal year 1997: 6,254; Fiscal year 1998: 7,357; 

Fiscal year 1999: 8,152; Fiscal year: 10,229; First quarter: 11,922; 

Second quarter 2001: 12,812; Third quarter 2001: N/A.



Debt, anticipated restatement; Fiscal year 1997: 6,965; Fiscal year 

1998: 7,918; Fiscal year 1999: 8,837; Fiscal year: 10,857; First 

quarter: 11,922; Second quarter 2001: 12,812; Third quarter 2001: 

12,978.



Note 1: As of September 14, 2002, Enron had not filed its 2001 Form 10-

K or amendments to its 1997 through 2000 financial reports to reflect 

the impacts of the anticipated restatements.



Note 2: N/A means not applicable.



Source: SEC filing.



[End of table]



Accounting/Audit Firm:



Arthur Andersen LLP (Arthur Andersen) was Enron’s independent auditor 

from 1985 to 2001. On January 17, 2002, Arthur Andersen was discharged 

by Enron’s board of directors. As of August 2002, the company did not 

have an independent auditor, and based on discussions with independent 

auditing firms, Enron management believed that the retention of an 

auditor is not feasible. Enron’s October 16, 2001, press release 

characterized numerous charges against income for the third quarter as 

nonrecurring, even though Arthur Andersen believed the company did not 

have a basis for concluding that the charges would in fact be 

nonrecurring. According to the U.S. Department of Justice indictment 

against Arthur Andersen, Arthur Andersen allegedly advised Enron 

against using the term “nonrecurring” and documented its objections 

internally in the event of litigation but did not report its objections 

or otherwise take steps to cure Enron’s public statement. The 

Department of Justice alleged that Arthur Andersen was put on direct 

notice of the allegations of Sherron Watkins, an Enron employee and 

former Arthur Andersen employee, regarding possible fraud and other 

improprieties at Enron. In particular, she noted the possibility of 

fraud in Enron’s use of off-balance-sheet SPEs that enabled the company 

to camouflage the true financial condition of the company. Ms. Watkins 

had reported her concerns to a partner at Arthur Andersen, who 

thereafter allegedly disseminated them within Arthur Andersen, 

including to the team working on the Enron audit.



Stock Price:



Enron’s stock traded on the New York Stock Exchange (NYSE) under the 

ticker symbol ENE. After being delisted from NYSE, Enron trades on the 

over the counter under the ticker symbol ENRNQ. Enron’s stock 

experienced a marked decline from May 2001 to October 2001, falling 

from over $60 per share to under $30 per share. Following the October 

16, 2001, announcement of its third quarter net loss, which included a 

$544 million loss on a structured finance arrangement, Enron’s stock 

price fell almost 75 percent from $33.84 to $9.05 by November 7, 2001, 

the day before it announced that it would restate earnings for 1997 

through 2001 (fig.15). In the days surrounding the restatement 

announcement, its stock price fell from $9.05 to $8.63, a drop of less 

than 5 percent. Shortly thereafter, following a precipitous decline 

from over $9 to just over $4 in the weeks following the restatement 

announcement, the stock lost 85 percent of its remaining value on 

November 28, 2001, dropping from $4.14 to $0.61, after a buyout by 

Dynegy Inc., fell through and bankruptcy appeared inevitable. As of 

September 13, 2002, the stock price closed at $0.16.



Figure 15: Daily Stock Prices for Enron, May 1, 2001-June 28, 2002:



[See PDF for image]



Source: GAO’s analysis of NYSE Trade and Quote and Nasdaq data.



[End of figure]



Securities Analysts’ Recommendations:



Based on available historical securities analyst information we were 

able to identify, as of October 18, 2001, 15 firms rated Enron a buy--

12 of the 15 considered the stock a strong buy. Even as late as 

November 8, 2001, the date of Enron’s disclosure that nearly 5 years of 

earnings would have to be recalculated, although most firms downgraded 

their ratings, 11 of 15 continued to recommend buying the stock, 3 

recommended holding, and only 1 recommended selling. In November 2001, 

one firm upgraded its recommendation from sell to hold.



Credit Rating Agency Actions:



Moody’s Investors Service, Inc. (Moody’s), and Standard and Poor’s 

rated Enron. Each reacted differently to Enron’s October 16, 2001, 

announcement of third-quarter losses. Standard and Poor’s affirmed 

Enron’s medium grade rating, which indicated that Enron had adequate 

capacity to meet its financial commitments. However, its rating also 

indicated that adverse economic conditions or changing circumstances 

were more likely to lead to a weakened capacity to meet financial 

commitments. Moody’s placed all of Enron’s long-term debt on review for 

possible downgrade. Both firms continued to downgrade Enron’s debt and 

commercial paper throughout October and November 2001. On December 3, 

2001, the day after Enron filed for bankruptcy protection under Chapter 

11, Standard and Poor’s lowered Enron’s rating to reflect its view that 

a default was likely and that Enron would fail to pay all or 

substantially all of its obligations when they came due. Moody’s 

downgraded Enron’s long-term debt ratings and senior unsecured debt to 

a low grade indicating that a partial recovery was possible.



Legal and Regulatory Actions Taken:



Enron is a defendant in several civil lawsuits. Early in 2002, a class-

action lawsuit was filed against Enron in the U.S. District Court for 

the Southern District of Texas. Among other things, the complaint 

alleges that certain Enron executives and directors, its accountants, 

law firms, and banks violated securities laws and conducted massive 

insider trading while making false and misleading statements. The trial 

is scheduled to begin on December 1, 2003. On December 2, 2001, Enron 

and 1,500 of its subsidiaries filed for Chapter 11 bankruptcy 

protection under the federal bankruptcy code.[Footnote 110]



On October 17, 2001, the day after Enron initially announced a large 

loss, the Securities and Exchange Commission (SEC or Commission) began 

an investigation by requesting in writing information from Enron. By 

October 19, 2001, Enron had notified Arthur Andersen that SEC had begun 

an inquiry regarding Enron’s SPEs and the involvement of Enron’s CFO. 

According to the Department of Justice action, on October 23, 2001, 

Arthur Andersen’s Enron engagement team allegedly began the wholesale 

destruction of documents at Arthur Andersen’s offices in Houston, 

Texas, under orders from Arthur Andersen partners. On or about November 

8, 2001, SEC served Arthur Andersen with a subpoena relating to its 

work for Enron. It was at that point that Arthur Andersen’s Enron team 

was instructed to halt destroying documents because the firm had been 

officially served a subpoena. Arthur Andersen’s lead Enron auditor, 

David B. Duncan, pled guilty to obstruction of justice charges on April 

9, 2002, and cooperated with authorities. On June 15, 2002, Arthur 

Andersen was found guilty of obstruction of justice. Arthur Andersen is 

appealing the decision. Also, on June 15, 2002, Arthur Andersen 

notified SEC that as of August 31, 2002, it would cease to practice 

before SEC. On September 2, 2002, Arthur Andersen announced that it had 

surrendered to state regulators all licenses “to practice public 

accountancy.”



SEC filed a subpoena enforcement action against Mr. Fastow, former CFO, 

for failing to appear for testimony before SEC staff on December 12, 

2001. On August 20, 2002, the Department of Justice filed suit against 

Michael J. Kopper, charging him with money-laundering conspiracy and 

conspiracy to commit wire fraud. The following day, August 21, 2002, 

SEC charged former senior Enron official Michael J. Kopper with 

violating the antifraud provisions of the federal securities laws. As 

of August 2002, no other legal action has been taken against Enron or 

its current or former employees by government agencies; however, 

investigations continue.



[End of section]



Appendix IX: Hayes Lemmerz International, Inc.:



Business Overview:



Hayes Lemmerz International, Inc. (Hayes) is a supplier of automotive 

and commercial highway wheels, brakes, power train, suspension, 

structural and other lightweight components. The company’s principal 

customers for wheel and brake products consist of every major original 

equipment manufacturer in North America, Europe, and Japan. The company 

has 46 plants, 6 joint venture facilities, and over 14,000 employees 

worldwide. For the fiscal year ended January 31, 2001, Hayes had net 

sales of $2 billion. On December 5, 2001, the company and certain of 

its subsidiaries filed for Chapter 11 bankruptcy protection under the 

federal bankruptcy code.



Restatement Data:



On September 5, 2001, the company announced that it would restate 

financial results for fiscal 2000 and the first quarter of fiscal 2001. 

According to its press release, these restatements would correct errors 

that the company and its auditors, KPMG LLP, identified in the 

accounting for certain items and write down the value of certain 

impaired assets at one of its manufacturing plants. In addition, Hayes 

announced that its audit committee of the board of directors was given 

the responsibility to investigate these accounting errors. The audit 

committee engaged Skadden, Arps, Slate, Meagher & Flom LLP and Ernst & 

Young LLP to advise it during this review. Subsequently, Hayes formally 

notified the Securities and Exchange Commission (SEC or Commission) 

that its Form 10-Q for the fiscal quarter ended July 31, 2001, would be 

delayed.



On December 13, 2001, Hayes announced that it had substantially 

completed its accounting investigation and restatement for fiscal 2000 

and the first quarter of 2001. In addition, Hayes announced that it was 

also restating its financial results for the fiscal year 1999 and 

related quarters. On February 19, 2002, Hayes filed its amended Form 

10-K with SEC, which restated its financial statements and cumulatively 

reduced previously reported net income for fiscal years 1999 and 2000 

and the first quarter of fiscal 2001 by $218 million in total (table 

13). The company also reported that earnings before interest, taxes, 

depreciation, and amortization (EBITDA), a measure of operating 

performance, would be reduced by $96.4 million. In addition, Hayes 

reported that non-EBITDA adjustments related primarily to asset 

impairment losses, increases in deferred income tax valuation 

allowances, and restructuring charges.



Table 13: Selected Financial Data, 1999-2001:



Dollars in millions.



Net income (loss), as reported; Fiscal year 1999: $65.1; Fiscal year

2000: $(41.8); First quarter 2001: $(7.6).



Net income (loss), as restated; Fiscal year 1999: 47.6; Fiscal year

2000: (186.2); First quarter 2001: (63.7).



Source: SEC filings.



[End of table]



Accounting/Audit Firm:



KPMG LLP was the company’s independent auditor. As of June 2002, KPMG 

LLP continued in that capacity.



Stock Price:



The company’s common stock was traded on the New York Stock Exchange 

(NYSE) under the ticker symbol HAZ. However, trading was suspended on 

December 6, 2001, after it filed for bankruptcy. Its stock was delisted 

on February 8, 2002. The company now trades over the counter under the 

ticker symbol HLMMQ.



In March 2001, Hayes traded at over $6 per share and trended upward to 

over $8 a share in June 2001. It remained volatile throughout August 

2001. On September 4, 2001, the day before it announced its financial 

restatement and the initiation of an internal investigation into its 

accounting practices, Hayes’s shares closed at $4.15. On September 6, 

2001, the day after the announcement, it closed at $1.80 per share (see 

fig. 16), a decline of more than 50 percent. When the company filed for 

bankruptcy on December 5, 2001, its stock price had fallen to $0.50 per 

share. 



Figure 16: Daily Stock Prices for Hayes, March 1, 2001-December 6, 

2001:



[See PDF for image]



Note: NYSE suspended trading of Hayes’s stock on December 6, 2001.



Source: GAO’s analysis of NYSE Trade and Quote data.



[End of figure]



Securities Analysts’ Recommendations:



Based on available historical securities analyst information we were 

able to identify, on November 21, 2000, almost a year before the 

restatement announcement, one analyst downgraded Hayes’s rating from a 

buy to neutral. In the week before the financial restatement, another 

analyst downgraded his recommendation on Hayes from buy to hold. On 

December 6, 2001, the same firm stopped its coverage of Hayes after the 

bankruptcy filing.



Credit Rating Agency Actions:



Both Moody’s Investors Service, Inc. (Moody’s) and Standard and Poor’s 

rated the company’s debt before and during the restatement period. In 

October 2000, Moody’s rated Hayes’s debt as poor, generally lacking 

characteristics of a desirable investment. In April 2001, Standard and 

Poor’s gave Hayes debt a generally comparable weak rating, which 

indicated that Hayes had the capacity to meet its financial obligations 

but was vulnerable to adverse business, financial, or economic 

conditions. In June 2001, Moody’s downgraded Hayes’s subordinated debt 

to very poor but considered its outlook stable. On September 6, 2001, 

the day after the restatement announcement and internal investigation, 

Standard and Poor’s maintained Hayes’s debt rating but assigned its 

outlook as negative. On the following day, September 7, 2001, Moody’s 

downgraded Hayes’s debt further and placed the company on review for a 

further downgrade. In October, Moody’s and Standard and Poor’s 

downgraded Hayes’s credit rating once again. On December 6, 2001, the 

day after Hayes filed for Chapter 11 bankruptcy protection, Standard 

and Poor’s downgraded its rating indicating that it had filed for 

bankruptcy protection. In January 2002, Standard and Poor’s placed 

Hayes on its nonrated list.



Legal and Regulatory Actions Taken:



On December 5, 2001, the company, its domestic subsidiaries, and one 

subsidiary in Mexico filed voluntary petitions under Chapter 11 of the 

U.S. Bankruptcy Code.[Footnote 111]



In May 2002, a group of Hayes bondholders brought a class-action 

lawsuit against 13 present and former directors and officers of Hayes 

(but not the company) and KPMG LLP in the U.S. District Court for the 

Eastern District of Michigan. The complaint seeks damages for a class 

of persons who purchased Hayes bonds between June 3, 1999, and 

September 5, 2001, and claim to have been injured because they relied 

on the allegedly false and misleading financial statements. The 

complaint was subsequently amended to add CIBC World Markets Corp. and 

Credit Suisse First Boston Corporation, underwriters for certain bonds 

issued by Hayes, as defendants.



Before the date Hayes commenced Chapter 11 bankruptcy, four class 

actions were filed in the U.S. District Court for the Eastern District 

of Michigan against Hayes and certain of its directors and officers, on 

behalf of purchasers of Hayes’s common stock from June 3, 1999, to 

December 13, 2001, based on similar allegations of securities fraud. On 

May 10, 2002, the plaintiffs filed a consolidated and amended class-

action complaint seeking damages against present and former Hayes 

officers and directors (but not the company).



According to the Hayes September 16, 2002, Form 10-Q filed with SEC, 

Hayes was under investigation by SEC for accounting errors found in its 

fiscal 1999, 2000, and the first quarter of fiscal 2001 statements.



[End of section]



Appendix X: JDS Uniphase Corporation:



Business Overview:



JDS Uniphase Corporation (JDS Uniphase) is a technology company that 

designs, develops, manufactures, and distributes fiber-optic 

components, modules and subsystems for the fiber-optic communications 

industry. These products are deployed in optical communications 

networks for the data communications, telecommunications, and cable 

television industries and include source and pump lasers and modulators 

to send signals across fiber-optic networks, as well as passive 

components that amplify and guide optical signals on their way. JDS 

Uniphase and its subsidiaries also use optics technology to offer 

products and solutions in other markets, including optical coatings, 

biomedical instruments, semiconductors and graphic arts. Nortel 

Networks, Alcatel, and Lucent account for a combined 36 percent of 

sales; other customers include CIENA, Tyco, Cisco, Compaq and Motorola.



According to company documentation, JDS Uniphase is the product of a 

number of substantial mergers and acquisitions, including the 

combination of Uniphase Corporation and JDS Fitel Inc., to form JDS 

Uniphase Corporation on June 30, 1999, and the subsequent acquisitions 

of Optical Coating Laboratory, Inc., (OCLI) on February 4, 2000; E-Tek 

Dynamics, Inc., (E-Tek) on June 30, 2000; and SDL, Inc., (SDL) on 

February 13, 2001. In 2001, JDS Uniphase sold a Zurich based pump laser 

manufacturing plant to Nortel to gain regulatory approval for the SDL 

acquisition. JDS Uniphase has planned additional facility closures and 

has laid off more than 50 percent of its staff in response to lagging 

sales and massive losses incurred from write-downs of its acquisitions.



Restatement Data:



On April 24, 2001, JDS Uniphase announced that it was evaluating the 

value of certain “long-lived” assets related to recent acquisitions and 

that the evaluation might result in an approximately $40 billion 

reduction in goodwill[Footnote 112] for the quarter ended March 31, 

2001. On May 11, 2001, JDS Uniphase filed its financial statements for 

the quarter ended March 31, 2001, with the Securities and Exchange 

Commission (SEC or Commission), reporting a net loss of $1.29 billion, 

which did not include charges related to goodwill impairment. On July 

26, 2001, JDS Uniphase announced it was recording reductions of $38.7 

billion and $6.1 billion in goodwill and other intangible assets for 

the quarters ended March 31, 2001, and June 30, 2001, respectively. The 

company also announced that it was conducting a further assessment of 

its long-lived assets and that additional adjustments to fiscal 2001 

results might be necessary. This review resulted in JDS Uniphase 

recording additional charges to reduce goodwill and other long-lived 

assets of $1.1 billion and $4.2 billion during the quarters ended March 

31, 2001, and June 30, 2001, respectively. The financial statements 

reflecting these charges, including the restated figures for the 

quarter ended March 31, 2001, were filed with SEC on September 19, 

2001. The restatement increased the company’s net loss from the 

originally reported amount of $1.3 billion to a restated loss of $41.9 

billion (table 14).



Table 14: Selected Financial Data, March 2001:



Dollars in billions; 



Third quarter fiscal year 2001 net loss, as reported; $1.3.

Third quarter fiscal year 2001 net loss, as restated; 41.9.



Source: SEC filing.



[End of table]



In addition to the $39.8 billion reduction in the carrying value of 

goodwill, the financial statements for the quarter ended March 31, 

2001, were restated to (1) reclassify $300.9 million in amounts paid to 

certain SDL executives in connection with the acquisition as 

compensation expense for the period, rather than acquisition costs as 

previously reported; (2) adjust for other acquisition costs related to 

the acquisitions of SDL and E-TEK for $16.8 million; and (3) record a 

charge of $714.5 million to write down the value of the company’s 

investment in ADVA, a publicly traded German company, due to an other 

than temporary decline in its fair value.



According to its SEC filing, JDS Uniphase sought guidance from SEC on 

valuing goodwill, ultimately deciding to take charges to reduce the 

carrying value of goodwill. The goodwill assessment carried out by JDS 

Uniphase was due to a significant sustained decline in industry market 

conditions, which resulted in the value of the company’s net assets 

exceeding the company’s market capitalization by approximately $39.8 

billion on March 31, 2001. The impairment charges for goodwill and 

other assets in the restated financials were based on the amount by 

which the book value of these assets exceeded their fair market value. 

Fair value was determined based on discounted future cash flows for the 

operating entities that had separately identifiable cash flows. Of the 

total write down, $46.6 billion was related to the goodwill primarily 

associated with the acquisitions of E-TEK, SDL, and OCLI.



Accounting/Audit Firm:



Ernst & Young, LLP (Ernst & Young) was the independent auditor for JDS 

Uniphase during the relevant period. It has been named in at least one 

class-action lawsuit filed April 23, 2002.



Stock Price:



JDS Uniphase Corporation is traded on the National Association 

Securities Dealers Automated Quotation (Nasdaq) under the symbol JDSU. 

On February 4, 2000, when JDS Uniphase initiated a substantial number 

of acquisitions with the purchase of OCLI, the company’s stock price 

was $105.59 per share. About 1 year later its stock price closed at 

less than half that price. From February 2001 to April 2001, its stock 

price continued to fall. On April 24, 2001, when JDS Uniphase announced 

that its review of the carrying amount of goodwill might result in a 

significant write-down, the stock price closed at $20.84, down $3.34 or 

almost 14 percent from the prior day’s close (fig. 17). On July 26, 

2001, when the company announced the charges for the quarters ended 

March 31, 2001, and June 30, 2001, the stock price closed at $9.47. 

Once JDS Uniphase filed its restated financials on September 19, 2001, 

the stock price further declined to $5.70. This represented a decline 

of over 70 percent from the initial announcement of the goodwill review 

on April 24, 2001. Over the same period, the Nasdaq Composite Index 

lost about 25 percent.



Figure 17: Daily Stock Prices for JDS Uniphase, October 2, 2000-October 

31, 2001:



[See PDF for image]



Source: GAO’s analysis of NYSE and Quote data.



[End of figure]



Securities Analysts’ Recommendations:



Based on historical analyst research information we identified, many 

firms covered JDS Uniphase in 2001. In the months before the 

restatement announcement, most firms had begun to downgrade the 

company’s stock to buy, neutral, or add. In April 2001, just days 

before the restatement announcement, several firms upgraded their 

recommendations. On the day of the announcement, one firm reiterated 

its strong buy and another downgraded its recommendation on JDS 

Uniphase stock to market perform.



In the period following the restatement announcement, most firms 

downgraded or reiterated their ratings, which included hold, neutral, 

buy and market perform. Several of the analysts upgraded the stock in 

September and October 2001 (the month of and the month following the 

restatement). Three others downgraded their ratings and one firm made 

no change. From February 2001 through October 2001, the time period 

surrounding the events of the restatement and goodwill reduction 

analyst recommendations included primarily buy and hold or neutral 

ratings. For example, after the company filed its restated financial 

statements on September 19, 2001, a number of firms upgraded their 

recommendations to buy ratings. Throughout 2001, the distribution of 

buy and hold ratings remained mixed.



Credit Rating Agency Actions:



No information was found.



Legal and Regulatory Actions Taken:



Several civil lawsuits, including a consolidated class-action suit, 

have been filed against JDS Uniphase since March 27, 2002. The lawsuits 

charge JDS Uniphase and certain of its officers and directors with 

violations of the Securities Exchange Act of 1934. The class-action 

complaint alleges, among other things, that JDS Uniphase and the other 

defendants were motivated to inflate the value of JDS Uniphase’s stock 

to finance its acquisitions and to enable top officers and directors of 

JDS Uniphase to sell their shares. Furthermore, the complaint alleges 

that JDS Uniphase violated federal securities law by failing to 

disclose that its earnings were artificially inflated due to the 

company’s failure to record write-downs of goodwill and other 

intangible assets associated with the mergers between Uniphase Corp., 

OCLI, E-Tek, and SDL and JDS Uniphase after it had become apparent that 

such assets were being carried at unrealistically and misleadingly high 

values. In at least one of the lawsuits, JDS Uniphase’s auditor, Ernst 

& Young, was named as a defendant. The complaint alleges that Ernst & 

Young violated federal securities laws by issuing unqualified audit 

opinions regarding JDS Uniphase’s financial statements that Ernst & 

Young knew or recklessly failed to discover were false and misleading.



As of August 21, 2002, SEC had taken no regulatory action against JDS 

Uniphase or any of its officers or directors.



[End of section]



Appendix XI: MicroStrategy Incorporated:



Business Overview:



MicroStrategy Incorporated (MicroStrategy) is a worldwide provider of 

business intelligence software that enables companies to analyze the 

raw data stored across their enterprises to reveal the trends and 

answers needed to manage their business. MicroStrategy’s software is 

used by workgroups, the enterprise and extranet communities via E-mail, 

Web, wireless and voice communication channels. MicroStrategy also 

offers services to its customers and partners, including consulting, 

education, and technical support, accounting for 60 percent of sales. 

Customers number over 1,700 and include retail, telecommunications, 

pharmaceutical, insurance, manufacturing, and financial services 

companies. In business intelligence software, MicroStrategy competes 

with Microsoft, Oracle, Hyperion Solutions, SAP AG, Computer 

Associates, and SAS. The company markets its products and services 

through partners and a direct sales force. MicroStrategy has over 480 

technology and integration partners, including IBM, PeopleSoft, and JD 

Edwards. A slumping economy has led the company to consolidate its 

operations and cut its workforce by more than one-third. On December 

31, 2001, MicroStrategy discontinued the operations of its Strategy.com 

subsidiary, a personalized information delivery network.



Restatement Data:



The Center for Financial Research & Analysis raised questions about 

certain accounting practices at MicroStrategy in a report issued in 

November 1999. Specifically, the report raised concerns about 

MicroStrategy’s revenue and earnings figures from an earlier quarter. 

On March 6, 2000, a Forbes magazine article also questioned 

MicroStrategy’s accounting of revenue.[Footnote 113] After discussions 

with its senior management, PricewaterhouseCoopers LLP (PwC), 

MicroStrategy’s auditor, recommended that the company issue a 

restatement. On March 20, 2000, MicroStrategy announced that it 

intended to restate its financial results for the fiscal years 1998 and 

1999. On April 13, 2000, MicroStrategy restated its net income by about 

$55.8 million for the years 1997, 1998 and 1999. The restatement 

reduced earnings for those 3 years, from a total net income of about 

$18.9 million to a net loss of about $36.9 million. In 1997 and 1998, 

net earnings were reduced by about $1.0 million and $8.4 million, or 

831 percent and 137 percent of the amount originally reported, 

respectively. In 1999, net earnings were reduced by about $46.4 

million, or 367 percent of the amount originally reported (table 15).



Table 15: Selected Financial Data, 1997-1999:



(Dollars in thousands).



Net income, as reported; Fiscal year 1997: $121; Fiscal year

1998: $6,178; Fiscal year 1999: $12,620.



Net income (loss), as restated; Fiscal year 1997: (885); Fiscal year

1998: (2,255); Fiscal year 1999: (33,743).



Source: SEC filings.



[End of table]



According to the Securities and Exchange Commission (SEC or Commission) 

order filed in December 2000, the company’s reporting failures 

primarily derived from its premature recognition of revenue from some 

of its software sales, in violation of The American Institute of 

Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2, 

with additional restatements resulting from the company’s failure to 

properly execute contracts in the same fiscal period that revenue was 

recorded from those deals, as well as other accounting errors.[Footnote 

114] Generally for accounting purposes, product revenue is recognized 

immediately, while revenue from services is recognized as the services 

are provided. According to the order, because MicroStrategy’s software 

license sales were part of multiple-element transactions that included 

other services such as product support and development and consulting, 

the company was required to apply contract accounting (the subscription 

method or the percentage of completion method of accounting). However, 

for a number of transactions that were subsequently restated, 

MicroStrategy had (1) improperly separated software license sales from 

their service elements and (2) characterized revenue in multiple 

element transactions as product or software revenue and recognized it 

at the time of the transaction.



SEC also alleged that additional accounting errors included the timing 

of contracts, valuing future obligations, and revenue recognition for 

barter transactions. In at least three instances, MicroStrategy 

recognized revenue on transactions that were not completed or signed by 

either party prior to the close of the quarter. In a separate 

transaction, MicroStrategy improperly recognized revenue for a license 

to unspecified future products and failed to recognize a deal as a 

barter transaction yielding no revenue.



In addition to restating its revenue, the company also restated several 

balance sheet items. This included a reduction of fixed assets by 

approximately $8.8 million, with approximately $5 million of this as a 

reduction of revenue, for the fiscal year-end December 31, 1999.



According to SEC’s order, one example of the alleged improper use of 

accounting by MicroStrategy was the handling of a transaction with NCR 

Corporation (NCR). MicroStrategy signed a final contract for a $27.5 

million transaction with NCR in the early hours of October 1, 1999. 

Although the contract had not been signed by the end of the quarter 

ended September 30, MicroStrategy improperly recognized $17.5 million 

in revenue from the transaction in its financial statements for the 

quarter ended September 30, 1999. NCR, however, did not record the 

transaction until its fourth quarter. MicroStrategy ultimately restated 

the NCR transaction due to a misapplication of SOP 97-2. By accounting 

for the NCR transaction in the third quarter, chief executive officer 

(CEO) Michael Saylor was able to announce on October 18, 1999, that 

MicroStrategy had achieved its 15th consecutive quarter of increased 

revenues. Without the improperly recognized transaction, revenues would 

have dropped nearly 20 percent from the previous quarter.



Accounting/Audit Firm:



PwC assumed its audit role in July 1998 and issued unqualified opinions 

on MicroStrategy’s subsequent financial statements. On January 26, 

2000, PwC certified MicroStrategy’s 1999 financial statements. After 

public scrutiny of third quarter results by the Center for Financial 

Research & Analysis and Forbes magazine, PwC recommended that 

MicroStrategy restate its financial statements in March 2000. Later 

that year, SEC began investigating the relationship between PwC and 

MicroStrategy. Specifically, SEC investigated PwC’s purchase of 

MicroStrategy products for resale to its consulting clients. According 

to Microstrategy, SEC’s investigation is still ongoing. To date, PwC 

has not been charged in this matter. On July 7, 2000, PwC was named as 

a defendant in a consolidated class-action lawsuit filed against 

MicroStrategy, its officers and directors. See the “Legal and 

Regulatory Actions” section of this case study.



Stock Price:



MicroStrategy stock trades on the National Association of Securities 

Dealers Automated Quotation (Nasdaq) under the ticker symbol MSTR. Even 

after questions were raised about MicroStrategy’s accounting practices, 

its stock price continued to increase dramatically. From the time that 

the Center for Financial Research & Analysis first raised concern on 

November 11, 1999, to the Forbes article on March 6, 2000, the stock 

price increased over 400 percent. On January 27, 2000, after 

MicroStrategy announced fourth quarter results, the stock price closed 

at $149.56 per share.[Footnote 115] The stock price continued to climb 

and doubled between the end of February and March 10, 2000, when the 

stock price closed at $313. On the last trading day before 

MicroStrategy announced its intended restatement, MicroStrategy’s 

stock price closed at $226.75 per share. On March 20, 2000, when 

MicroStrategy announced that its financial statements for the past 2 

years would need to be restated, the stock price fell over 60 percent 

to close at $86.75. The stock price continued to fall the day after the 

announcement and closed at $72.31. Over these 3 trading days, the stock 

price fell almost 70 percent. By the time MicroStrategy filed its 

restated financial statements with SEC on April 13, 2000, the stock 

price closed at $39.06. On July 25, 2002, the stock price closed at 

$0.47. On September 17, 2002, the stock price closed at 

$10.29.[Footnote 116]



Figure 18: Daily Stock Prices for MicroStrategy, September 1, 1999-

September 29, 2000:



[See PDF for image]



Note: Stock prices have been adjusted to account for the January 26, 

2000, 2:1 stock split.



Source: GAO’s analysis of NYSE TAQ data.



[End of figure]



Securities Analysts’ Recommendations:



Based on historical securities analysts’ research we found, in early 

2000, as MicroStrategy’s stock price increased, analysts promoted the 

stock. For example, on January 12, 2000, one firm reiterated its strong 

buy recommendation, while another reiterated its buy recommendation on 

January 28, 2000. While a number of firms downgraded their 

recommendations after the March 20, 2000, restatement announcement, the 

downgrades ranged from accumulate to hold. For example, on March 20, 

2000, one firm downgraded MicroStrategy from near-term/long-term buy to 

near-term/long-term accumulate while three other firms downgraded from 

strong buy and long-term buy to accumulate and hold, respectively, on 

April 27, 2000.



Credit Rating Agency Actions:



No information was found.



Legal and Regulatory Actions Taken:



From March 2000 through May 2000, 25 class-action complaints were filed 

against MicroStrategy and certain of its officers and directors 

alleging violations of Section 10(b), Rule 10b-5 thereunder, Section 

20(a) and Section 20A of the Securities Exchange Act of 1934 (Exchange 

Act). The company’s auditor, PwC, was also named in two of the suits. 

The complaints contained varying allegations, including that 

MicroStrategy made materially false and misleading statements regarding 

the company’s 1997, 1998, and 1999 financial results in filings with 

SEC, analysts’ reports, press releases and media reports. These class-

action lawsuits were consolidated and a settlement agreement was later 

reached on October 23, 2000. The class members were entitled to receive 

(1) an aggregate principal amount of $80.3 million of MicroStrategy’s 

7.5 percent series A unsecured notes, which have a 5-year maturity and 

bear interest at 7.5 percent per year, payable semiannually; (2) 

297,330 shares of class A common stock; (3) warrants to purchase 

189,698 shares of class A common stock at an exercise price of $400.00 

per share, with the warrants expiring on June 24, 2007; and (4) 

approximately $5,000 in cash to settle remaining fractional interests. 

On June 24, 2002, all of the common stock, warrants and cash were 

issued to the class members. The company issued 1 percent of the 

aggregate principal amount of the promissory notes on June 24, 2002, 

and issued the remaining 99 percent of the aggregate principal amount 

of the promissory notes on July 2, 2002. PwC also settled its class-

action lawsuit in connection with the restatement of MicroStrategy’s 

financial statements with a $55 million cash payment.



On June 30, 2000, a shareholder derivative action was filed in the 

Delaware Court of Chancery seeking recovery for various alleged 

breaches of fiduciary duties by certain of the company’s directors and 

officers relating to its restatement of financial results. 

Subsequently, Microstrategy and the directors and officers named as 

defendants settled this action. Under the settlement, MicroStrategy 

added two new independent directors with finance experience to the 

audit committee of its board of directors and will ensure continued 

adherence with applicable legal and regulatory requirements regarding 

the independence of audit committee members and trading by insiders. On 

November 7, 2001, as a part of the derivative settlement agreement and 

in satisfaction of a condition to the distribution of the securities 

issued as part of the class-action settlement, Mr. Saylor, chairman of 

the board of directors and CEO; Mr. Bansal, vice chairman, executive 

vice president and chief operating officer (COO); and Mr. Lynch, former 

chief financial officer (CFO) and current vice president of business 

affairs, tendered to MicroStrategy for cancellation an aggregate of 

168,350 shares of class A common stock held by them.



In March 2000, SEC issued a formal order of investigation of 

MicroStrategy relating to the company’s restatement of revenue and 

earnings. On December 14, 2000, this investigation resulted in SEC’s 

initiation and settlement of administrative reporting charges against 

MicroStrategy and accounting fraud charges against its Mr. Saylor, CEO; 

Sanju K. Bansal, COO; and Mark S. Lynch, former CFO.



The charges against the company were instituted through entry of an 

order instituting proceedings pursuant to Section 21C of the Exchange 

Act, making findings, and imposing remedial sanctions and a cease and 

desist order. SEC found that MicroStrategy violated Sections 13(a), 

13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 13a-1 and 

13a-13 thereunder, relating to the filing of annual and quarterly 

reports, the recording of transactions, and the maintenance of accurate 

books and records. The company consented to this order and agreed to 

significant undertakings in the areas of corporate governance, 

management, and compliance in order to strengthen the company’s 

financial reporting and accounting processes.



The action against MicroStrategy’s top three officers alleged that they 

materially overstated MicroStrategy’s revenues and earnings from the 

time of its initial public offering in June 1998 through March 2000. 

SEC alleged that Mr. Lynch, the CFO, was principally responsible for 

ensuring the veracity of MicroStrategy’s financial reporting and signed 

the company’ periodic reports. Mr. Saylor, the CEO, signed the periodic 

reports and participated in the negotiation of several of the largest 

restated transactions. Mr. Bansal, the COO, also participated in the 

negotiation of several of the restated transactions and signed numerous 

contracts on which revenue was improperly recognized. Without admitting 

or denying the allegations, these company officers consented to the 

entry of a final judgment permanently enjoining each of them from 

violating the antifraud and recordkeeping provisions of the federal 

securities laws (Section 17(a) of the Securities Act of 1933, Section 

10(b) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder). These 

officers further agreed to disgorge a total of approximately $10 

million and pay civil penalties of $350,000 each. Mr. Lynch also 

consented to the entry of an administrative order pursuant to SEC Rule 

102(e)(3), based on entry of an injunction, barring him from practicing 

before SEC as an accountant, with a right to reapply after 3 years. SEC 

also instituted a settled order against Antoinette A. Parsons, 

MicroStrategy’s corporate controller, and Stacy L. Hamm, the accounting 

manager, in which each consented to the entry of a cease and desist 

order for reporting and recordkeeping violations.



[End of section]



Appendix XII: Orbital Sciences Corporation:



Business Overview:



Orbital Sciences Corporation (Orbital) is a space technology company 

that designs, manufactures, operates, and markets a broad range of 

space-related systems for commercial, government and military 

customers. Orbital’s products include low-level orbit, geosynchronous 

orbit, and planetary spacecraft used for communications, remote 

sensing, and scientific purposes. The company also provides launch 

services used to place satellites into orbit and suborbital launch 

vehicles and missile defense boosters that are used as interceptor and 

target vehicles in missile defense systems. The U.S. government and its 

contractors account for about 55 percent of Orbital’s 2001 sales. For 

the 6 months ending June 30, 2002, revenues rose 26 percent to $256.1 

million. Net income from continuing operations totaled $7.8 million for 

the 6 months ended June 30, 2002, versus a net loss of $47.8 million 

for the comparable 2001 period.



Restatement Data:



During 1999 and 2000, Orbital made a number of announcements regarding 

various determinations to restate its financial statements. Initially, 

on February 16, 1999, Orbital announced that the company would restate 

its financial statements for the first three quarters of 1998, based 

upon recommendations made by its independent auditors, KPMG LLP. The 

company indicated that it did not agree with such recommendations, 

which related primarily to the accounting treatment of certain 

capitalized costs and revenue recognition. On April 29, 1999, the 

company fired KPMG LLP due to disagreements with regard to, among other 

things, the above-described accounting issues. Orbital engaged 

PricewaterhouseCoopers LLP (PwC) as its new independent auditor.



On October 29, 1999, Orbital announced that based on a recommendation 

by PwC, the company would change its previously audited accounting 

treatment primarily with respect to its investment in an affiliate. 

While KPMG LLP had previously reviewed and approved the company’s prior 

accounting treatment, when the issue was raised by PwC, KPMG LLP 

informed the company that KPMG LLP had changed its position and the 

company’s financial statements should be restated for fiscal years 

ended December 31, 1997, and 1998.



On March 30, 2000, Orbital announced that the issuance of its final 

audited financial statements for the quarter and year ended December 

31, 1999, would be delayed due to a disagreement between its current 

and previous auditors on whether previously capitalized costs related 

to the company’s two principal space launch vehicles should be 

expensed. The third restatement announcement occurred on April 14, 

2000. The company announced that based on the recommendation of its 

current auditors, PwC, Orbital determined that it would also restate 

its financial statements for the years ended December 31, 1995, and 

1996, in order to expense costs related to the company’s two principal 

space launch vehicles that were previously capitalized. The company 

also announced that it was continuing to work with its current and 

previous auditors to finalize the previously announced restatements for 

1997, 1998, and the first three quarters of 1999.



On April 17 and April 19, 2000, the company released its restated 1998 

to 1999 and 1995 to 1997 financial results. Subsequently, the company 

filed a series of amendments to its 1995 to 1998 Form 10-Ks and related 

Form 10-Qs, including the first three quarters of 1999 (table 16).



Table 16: Selected Financial Data 1995-1999:



(Dollars in thousands).



Net income (loss), as reported; Fiscal year 1995: $(4,848); Fiscal 

year 1996: $15,907; Fiscal year 1997: $23,005; Fiscal year 1998: 
$(6,372); 

First quarter 1999: $(15,871); Second quarter 1999: $(10,149); Third 

quarter 1999: $(32,649).



Net income (loss), as restated; Fiscal year 1995: (5,590); Fiscal year 

1996: 9,942; Fiscal year 1997: (11,405); ds): Fiscal year 1998: 
(56,552); 

First quarter 1999: (26,163); Second quarter 1999: (26,071); Third 

quarter 1999: (39,566).



Source: SEC filings.



[End of table]



Accounting/Audit Firm:



During the periods that were eventually restated, KPMG LLP was 

Orbital’s independent accountant. Orbital fired KPMG LLP on April 29, 

1999, after Orbital and KPMG LLP were unable to agree on the 

interpretation and application of various accounting standards. KPMG 

LLP had advised the company that it believed there were material 

weaknesses in certain of Orbital’s internal control systems. Press 

sources noted although KPMG LLP initially signed off on Orbital’s 

financial statements for the periods concerned, KPMG LLP documented 

their issues with the firm in a May 14, 1999, letter to the Securities 

and Exchange Commission (SEC) and in a confidential letter to the audit 

committee of Orbital’s board of directors. Subsequently, Orbital hired 

PwC, which advised Orbital in October 1999 to restate its financial 

statements for the years 1997, 1998, and part of 1999 due to 

questionable accounting treatment with respect to its investment in an 

affiliate, Orbital Imaging Corporation. KPMG LLP concurred with these 

restatements. Additionally, Orbital restated 1995 and 1996 financial 

results as a result of a change in how it accounted for product 

enhancement costs.



Stock Price:



Orbital’s stock is traded on the New York Stock Exchange (NYSE) under 

the ticker symbol ORB. The stock peaked at over $45 per share in mid-

January 1999 (Fig. 19). A sharp decline ensued following an earnings 

warning from the company on February 4, 1999, in which Orbital said 

that accounting changes at two of its units would cause it to miss 

earnings estimates. The stock closed at $29.625 on February 16, 1999, 

and after the close of trading the company reported its fiscal fourth 

quarter numbers--which were far below analyst estimates--and announced 

a restatement. On February 17, 1999, Orbital shares fell $2.25 (8 

percent) to $27.375. Later, after reporting a large fiscal first-

quarter loss and announcing a change of auditors on April 29,1999, 

Orbital’s stock declined over 25 percent. Then, in mid-September 1999, 

a brokerage firm lowered its third-quarter estimates for Orbital; the 

stock dropped from over $23 to the mid-teens by late October 1999. On 

October 29, 1999, the date that Orbital announced that it would need to 

restate back to 1997, its stock fell slightly. On March 30 and April 

14, 2000, Orbital issued announcements regarding delays in the release 

of financial statements as a result of deciding to restate additional 

years. Finally, beginning in April 2000 Orbital began to release its 

restated numbers. The stream of earnings disappointments and accounting 

problems contributed to the stock moving from over $40 in early 1999 to 

under $10 in late 2000. Over the same period the stock market increased 

over 20 percent.



Figure 19: Daily Stock Prices for Orbital, August 3, 1998-September 29, 

2000:



[See PDF for image]



Source: GAO’s analysis of NYSE Trade and Quote data.



[End of figure]



Securities Analysts’ Recommendations:



Based on historical analyst research we were able to find, at least 11 

firms covered Orbital. All maintained recommendations ranging from hold 

to buy. Of the firms that took action in 1999 and 2000, half downgraded 

their recommendations. For example, on August 9, 2000, one firm 

downgraded the stock from a strong buy to a buy, based primarily on 

Orbital’s second-quarter 2000 performance. Another firm stated that 

despite the troubles with Orbital’s affiliate Orbcomm, which Orbital 

had written off, it rated the company as an outperform with a $17 price 

target. At that time, the stock was trading at $9.63 (August 16, 2000).



Credit Rating Agency Actions:



Moody’s Investors Service, Inc. (Moody’s) and Standard and Poor’s rated 

Orbital’s debt. In 1998 Moody’s credit rating for Orbital’s debt 

indicated that it generally lacked the characteristics of a desired 

investment and assurance that interest and principal payments over any 

long period may be small. Standard and Poor’s rating was slightly 

higher, indicating that it faced major ongoing uncertainties and 

exposure to adverse business, financial, or economic conditions, which 

could affect its capacity to meet its financial commitments. In June 

1999, Moody’s downgraded Orbital’s debt rating to poor. In November 

1999, after the October restatement announcement, Standard and Poor’s 

lowered Orbital’s credit rating as well. In May 2000, Standard and 

Poor’s reaffirmed its rating.



Legal and Regulatory Actions Taken:



In the first quarter of 1999, several lawsuits were filed by investors 

on behalf of shareholders against Orbital and KPMG LLP. The lawsuits 

related to, among other things, matters underlying the restatements 

announced in February 1999. These lawsuits were eventually consolidated 

into a class-action lawsuit. In the fourth quarter of 1999, in 

connection with the company’s October 1999 restatement announcement, 

another class-action lawsuit was filed against Orbital. According to 

Orbital, the consolidated class-action lawsuits were settled. Under the 

settlement, Orbital’s insurance carrier was to pay $11 million to the 

shareholder class. In addition, Orbital was to issue warrants having an 

aggregate fair value of $11.5 million as of the settlement date. The 

proposed settlement of the class-action lawsuit against KPMG LLP 

required KPMG LLP to pay $1 million in cash.



SEC filed an amicus curaie--friend of the court brief--related to 

motions filed with the court regarding the appointment of lead 

plaintiff in the shareholder actions. However, to date, SEC has not 

pursued any legal or administrative proceedings against the company 

related to securities violations.



[End of section]



Appendix XIII: Rite Aid Corporation:



Business Overview:



Rite Aid Corporation (Rite Aid) is the third largest retail drugstore 

chain in the United States, operating nearly 3,500 retail drugstores in 

28 states and the District of Columbia. Rite Aid sells prescription 

drugs--accounting for about 60 percent of sales--nonprescription 

medications, health and beauty aids, personal care items, cosmetics, 

photo processing and convenience items. In July 1999, Rite Aid 

partnered with the Internet pharmacy drugstore.com with an 

approximately 22 percent equity investment, which has since been sold. 

During the 1990s, Rite Aid expanded through a number of acquisitions, 

including Perry Drug Stores in fiscal year 1995; Thrifty PayLess 

Holdings, Inc., (Thrifty PayLess) in fiscal year 1996; Harco Inc., 

(Harco); and K&B Inc., (K&B), in fiscal year 1997; and PCS Health 

Systems Inc., (PCS) in fiscal year 1999. In order to reduce debt, Rite 

Aid sold the health care provider PCS to Advance Paradigm in October 

2000.



Restatement Data:



On June 1, 1999, Rite Aid filed its Form 10-K with the Securities and 

Exchange Commission (SEC or Commission), which included its financial 

statements for fiscal year ended February 27, 1999. This filing also 

contained restatements of Rite Aid’s prior financial statements for 

fiscal years 1997 and 1998, and the interim periods for 1998 and 1999. 

According to the filing, the restatement followed discussions between 

Rite Aid and SEC concerning an SEC review of a filed registration 

statement. On October 11, 1999, following further discussions with SEC, 

Rite Aid announced that it would again restate previously reported 

interim and annual financial statements for 1997, 1998, and 1999.



On October 18, 1999, Martin L. Grass resigned his positions as chairman 

of the board and chief executive officer (CEO) of Rite Aid. Frank 

Bergonzi, who had previously stepped down as the company’s chief 

financial officer (CFO), also left the company. On November 11, 1999, 

KPMG LLP resigned as Rite Aid’s auditor and withdrew its report on the 

company’s consolidated financial statements for the 3-year period ended 

February 27, 1999, stating that it was unable to continue to rely on 

management’s representations.



In its quarterly report for the second quarter of fiscal year 2000, 

filed on November 2, 1999, Rite Aid restated its previously reported 

financial statements for the first two quarters of fiscal year 1999 and 

the first quarter of fiscal year 2000. In that filing, Rite Aid 

indicated that additional adjustments to its financial statements might 

be necessary.



According to Rite Aid’s filing with SEC, on December 5, 1999, Rite Aid 

hired a new executive management team that started a process to resolve 

the company’s financial reporting issues. Rite Aid’s new management 

team reevaluated the accounting issues identified before December 1999 

as well as an investigation and restatement for 1998, 1999, and the 

first two quarters of 2000. According to Rite Aid, after the new 

management team arrived, it (1) hired a new auditor; (2) engaged a law 

firm, through the audit committee of the board, to conduct an 

investigation of its reporting and accounting practices with the 

assistance of Deloitte & Touche LLP; (3) decided not to file additional 

reports with SEC until the new audit was complete; (4) retained Arthur 

Andersen LLP to assist with reconciling the books; and (5) began to 

develop a plan to strengthen the company’s internal controls. Rite Aid 

filed the result of this review with SEC on July 11, 2000, which 

included restatements for 1998, 1999, and part of 2000. The aggregate 

affect of these adjustments was to reduce net income by $492 million 

and $566 million for fiscal 1998 and 1999, respectively. Likewise, the 

adjustments for 1998 and 1999 reduced retained earnings by $1.6 

billion. Rite Aid did not restate 1996 and 1997 financial statements 

because it believed that it would require unreasonable cost and 

expense. However, the company reported that the financial data for 1997 

and 1996 should not be relied upon.



According to SEC’s complaint filed against the company, Rite Aid’s 

misstated financials were due to widespread errors resulting from 

faulty, inappropriate, and misleading accounting practices. Rite Aid 

listed its major adjustments to correct these practices as follows:



* Adjustments to inventory and cost of goods sold included correcting 

unearned vendor allowances previously recorded as a reduction to cost 

of goods sold, correctly applying the retail method of accounting, 

recording write downs for slow moving and obsolete inventory, 

recognizing certain selling costs including promotional markdowns and 

shrink in the period in which they were incurred, accruing for 

inventory cutoff, and reflecting unearned vendor allowances in the 

inventory balances. For example, for those vendors that did not require 

Rite Aid to return damaged and outdated products, Rite Aid had the 

products destroyed and reported to the vendor the quantity and dollar 

value of the destroyed product and deducted the value of the destroyed 

products from a future remittance to the vendor. Rite Aid allegedly 

inflated these values.



* Rite Aid also failed to expense the cost of the company’s stock 

appreciation rights program.



* Adjustments to property, plant, and equipment that were previously 

capitalized to expense them in the period in which they were incurred. 

The items include certain costs for repairs and maintenance, interest, 

and internal software expenditures. The adjustments also include 

increases to depreciation expense to reverse the effects of retroactive 

changes made to the useful lives of certain assets, to depreciate 

assets misclassified as construction in progress and to recognize 

depreciation expense in the appropriate periods.



* Adjustments to lease obligations to reflect the sale leaseback of 

certain stores as financing transactions. Such transactions had 

previously been accounted for as sales with corresponding operating 

leases. The adjustment to correct these items resulted in the reversal 

of the asset sales and the establishment of lease obligations. In 

addition, certain leases previously accounted for as operating leases, 

were determined to be capital leases.



* Adjustments for liabilities associated with Rite Aid’s acquisition of 

Thrifty PayLess in fiscal 1997 and Harco and K&B in fiscal 1998. 

Certain liabilities associated with these acquisitions that had 

previously been established with a corresponding increase to goodwill 

have either been reduced or eliminated to correctly reflect the fair 

value of the assets and liabilities acquired at the date of 

acquisition.



* Adjustments to expense certain operating costs in the period in which 

they were incurred and to record a corresponding liability for those 

items not paid at the end of the period. Such costs primarily consisted 

of payroll, vacation pay, incentive compensation, executive retirement 

plans, scheduled rent increases, and certain insurance claims.



* Adjustments to appropriately recognize charges related to store 

closures in the period in which the decision, and ability, to close a 

store was made. In addition, other charges not related to exiting 

stores and gains from the sale of certain assets that had previously 

been recorded as adjustments to the store exit liability were reflected 

as income or expense in the period in which they were incurred or 

realized.



After filing the 2000 Form 10-K, Rite Aid initiated the process of 

posting the $1.6 billion of restatement adjustments previously reported 

to the company’s detailed books and records for each of the periods 

involved. Subsequently, Rite Aid identified errors that had been made 

when processing the restatement adjustments that affected the restated 

results for all annual and quarterly reports in the company’s 2000 Form 

10-K. As a result, additional adjustments having a cumulative effect of 

$1.6 million on retained earnings on February 26, 2000, were made to 

the financial statements for fiscal years 1998, 1999, and 2000. Despite 

the relatively small size of these adjustments, Rite Aid further 

restated the financial statements covered in the July 11, 2000, 

restatement in an amended Form 10-K filed October 11, 2000. The 

restatement decreased Rite Aid’s previously reported net loss for the 

fiscal year 2000 by $10 million, increased the net loss by $39 million 

for fiscal year 1999, and decreased the net loss for 1998 by $21 

million. This resulted in restated net losses of $1.1 billion, $461.5 

million, and $165.2 million, respectively (table 17).



Table 17: Selected Financial Data, 1997-2000:



Dollars in millions.



Net income (loss), as reported; Fiscal year 1997: $115; Fiscal year 

1998: $316; Fiscal year 1999: $144; Fiscal year 2000: ($1,143).



Net income (loss), as restated in June 1999; Fiscal year 1997: 117; 

Fiscal year 1998: 306; Fiscal year 1999: N/A; Fiscal year 2000: N/A.



Net income (loss), as restated in July 2000; Fiscal year 1997: N/A; 

Fiscal year 1998: (186); Fiscal year 1999: (423); Fiscal year 2000: 

N/A.



Net (loss), as restated in October 2000; Fiscal year 1997: N/A; Fiscal 

year 1998: (165); Fiscal year 1999: (462); Fiscal year 2000: (1,133).



Note: N/A means not applicable.



Source: SEC filings.



[End of table]



Accounting/Audit Firm:



KPMG LLP was Rite Aid’s independent auditor for fiscal years 1998 and 

1999. KPMG LLP played a role in Rite Aid’s June 1, 1999, restatement. 

At a meeting of Rite Aid’s audit committee, on June 30, 1999, KPMG LLP 

delivered a letter to the audit committee dated June 24, 1999, that 

described a number of material weaknesses in Rite Aid’s internal 

controls. The letter stated that Rite Aid’s internal controls were 

insufficient to allow the company’s management “to accumulate and 

reconcile information necessary to properly record and analyze 

transactions on a timely basis.” The letter also suggested a number of 

actions to improve the quality of Rite Aid’s financial accounting and 

reporting functions. KPMG LLP recounted that it informed Rite Aid on 

June 23, 1999, and the audit committee at the June 30, 1999, meeting 

that, as a result of the issuance of the material weakness letter, KPMG 

LLP would not be in a position to issue quarterly review reports until 

the matters it raised were addressed and resolved. KPMG LLP also 

asserted that it was no longer willing to rely on representations made 

by the serving CFO at that time. The members of Rite Aid’s audit 

committee and another member of the company’s board of directors who 

attended the June 30, 1999, meeting deny that any such statements were 

made, while KPMG LLP strongly stands behind its recollection of the 

meeting. Subsequent to the meeting, Rite Aid says that actions were 

taken to evaluate system needs in order to improve its financial 

reporting system. On December 5, 1999, Rite Aid’s CFO was replaced. On 

November 11, 1999, KPMG LLP resigned as auditor of Rite Aid because it 

was unable to rely on management’s representations. KPMG LLP also 

withdrew its auditor’s report dated May 28, 1999, of Rite Aid’s 

financial statements. The withdrawn report and KPMG LLP’s report on 

Rite Aid’s financial statements for the fiscal year ended February 28, 

1998, did not contain an adverse opinion or a disclaimer of opinion and 

were not qualified or modified as to uncertainty, audit scope, or 

accounting principles. However, SEC has alleged in a complaint dated 

June 21, 2002, that Rite Aid’s CEO provided, and directed his staff to 

provide, false and misleading information to KPMG LLP. The false 

information included, among other things, Rite Aid’s books and records, 

unaudited financial statements, and bank records.



Rite Aid subsequently hired Deloitte & Touche LLP as its independent 

auditor.



Stock Price:



Rite Aid stock trades on the New York Stock Exchange (NYSE) under the 

ticker symbol RAD. In early 1999, Rite Aid’s stock traded between $40 

and $50 per share. However, on March 12, 1999, Rite Aid announced its 

fourth-quarter results, which were below analysts’ estimates, and its 

stock price dropped almost 40 percent from a closing price of $37.00 on 

March 11, 1999, to $22.56 the following day (fig. 20). On June 1, 1999, 

when Rite Aid announced that it had restated 3 previous years of 

earnings, the stock price closed at $26.69. The following day, June 2, 

1999, the stock price closed at $24.50. By October 11, 1999, when Rite 

Aid announced that it would once again restate its 1997 through 1999 

earnings, its stock price closed at $10. Around this time Rite Aid also 

announced that it would not be able to file its Form 10-Q on time. 

Overall, Rite Aid’s stock price fell almost 60 percent from June to 

October and continued to fall for most of the balance of 1999. The 

stock price finished 1999 at slightly above $11. On July 11, 2000, when 

Rite Aid filed its Form 10-K with SEC, which included restated 

financial statements for the previously restated periods, its stock 

closed at $6.62, down over 20 percent from $8.38 the day before the 

restatement; the day after the restatement, the stock slipped to $6 (a 

drop of almost 30 percent over the 3 days). The stock price continued 

to decline, and when Rite Aid filed its amended annual report in 

October 2000, its stock price closed at $3.06.



Figure 20: Daily Stock Prices for Rite Aid, December 1, 1998-December 

31, 1999:



[See PDF for image]



Source: GAO’s analysis of NYSE Trade and Quote data.



[End of figure]



Securities Analysts’ Recommendations:



Based on available historical information on securities analysts’ 

recommendations, we identified eight firms that covered Rite Aid during 

the relevant period. Although analysts use a variety of recommendations 

to indicate whether to buy or sell securities, one rated it as a hold 

and the other rated it as near-term neutral. Even on the news that Rite 

Aid had restated its 1997, 1998, and 1999 financials for a fourth time, 

one firm upgraded its recommendation in 2000. Recommendations on Rite 

Aid’s stock have continued to vary, with some analysts downgrading 

their recommendations and others upgrading them.



Credit Rating Agency Actions:



Rite Aid’s debt is rated by Moody’s Investors Service, Inc. (Moody’s) 

and Standard and Poor’s rating agencies. Moody’s and Standard and 

Poor’s began to lower Rite Aid’s credit rating in 1995 and made several 

rating actions over the next several years. In 1996 and 1998, Moody’s 

confirmed Rite Aid’s debt, which indicated that its debt offered 

adequate financial security while Standard and Poor’s took no action. 

In June 1999, 3 days after the restatement of its 1997 to 1999 

financial statements, Moody’s confirmed Rite Aid’s rating but changed 

its outlook to negative, while on June 14, 1999, almost 2 weeks after 

the June 1, 1999, restatement, Standard and Poor’s lowered its rating. 

In September 1999, the month before the revised restatement, Moody’s 

placed Rite Aid’s rating on review for possible downgrade. On October 

1, 1999, a week before the restatement of the previously restated 

financial statements, Moody’s downgraded Rite Aid’s rating, indicating 

that certain protective elements might be lacking over time, and rated 

its outlook as negative. Standard and Poor’s took similar action days 

before the October 11, 1999, restatement. Within weeks, Moody’s and 

Standard and Poor’s downgraded Rite Aid’s debt again indicating that 

its long-term debt was of questionable financial security and 

maintained their negative outlook. One month later, Moody’s lowered 

Rite Aid’s rating again indicating that it offered poor financial 

security and the outlook remained negative. In 2000, Moody’s and 

Standard and Poor’s downgraded Rite Aid’s rating even further.



Legal and Regulatory Actions Taken:



On March 15, 1999, a securities class-action lawsuit was filed against 

Rite Aid, its directors, officers, and outside auditor, KPMG LLP. Rite 

Aid was accused of making materially false and misleading statements 

and artificially inflating the price of Rite Aid’s common stock. In 

November 2001, Rite Aid agreed to pay $45 million in cash and about 

$150 million in stock to its shareholders to settle the suit. Although 

shareholders settled with the company, there are still outstanding 

civil cases against KPMG LLP, Mr. Martin L . Grass and Mr. Frank M. 

Bergonzi.



According to Rite Aid’s filings with SEC, in November 1999, SEC began a 

formal investigation of Rite Aid’s financial statements after Rite Aid 

restated its earnings twice for the 3 prior fiscal years. On June 21, 

2002, SEC announced that it had settled with Rite Aid and Timothy J. 

Noonan, its former president and chief operating officer (COO). Neither 

Rite Aid nor Mr. Noonan admitted nor denied SEC’s findings. According 

to the cease-and-desist order, SEC alleged that Rite Aid’s former 

management team engaged in financial fraud that materially overstated 

the company’s net income for fiscal years 1998, 1999, and the first 

quarter of 2000. SEC further alleged that Rite Aid’s former senior 

management failed to disclose material information, including related-

party transactions, in proxy and registration statements, and a Form 8-

K filed in February 1999.



SEC alleged that Rite Aid violated the reporting, books and records, 

and internal controls provisions of the Securities Exchange Act of 1934 

(Exchange Act). According to SEC, Rite Aid’s internal books, records, 

and accounts reflected numerous transactions that were invalid or 

without substantiation, had no legitimate business purpose, and were 

recorded in violation of generally accepted accounting principles 

(GAAP). Moreover, SEC charged that from at least 1997 to July 11, 2000, 

all of the annual and quarterly reports that Rite Aid filed with SEC 

contained misleading financial statements. As a result, Rite Aid 

violated Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 

12b-20, 13a-1, and 13a-13 thereunder. SEC further alleged that Rite 

Aid’s system of internal accounting controls was not designed to 

provide reasonable assurances that transactions were recorded as 

necessary to permit preparation of financial statements in conformity 

with GAAP or to maintain the accountability of assets; hence, Rite 

Aid’s system of internal accounting controls failed to prevent, and 

facilitated, the improper accounting practices described above. As a 

result, SEC charged that Rite Aid violated Section 13(b) of the 

Exchange Act and Rule 13(b)(2)(B) thereunder.



SEC also settled its cease-and-desist proceeding against Mr. Noonan, a 

director, president, and COO of Rite Aid from March 1995 to December 

1999 and interim CEO from October 15, 1999 through December 5, 1999. 

SEC alleged that Mr. Noonan participated in activities that caused Rite 

Aid to overstate its net income by, among other things, understating 

its vendor accounts payable and cost of goods sold. The order alleged 

that Mr. Noonan was aware that Rite Aid improperly inflated the 

quantities and dollar value of damaged and outdated products reported 

to vendors that did not require Rite Aid to return these products to 

them. In addition, SEC alleges Rite Aid falsely reported price 

markdowns as damaged and outdated products. The vendors did not agree 

to the charges and were misled into believing that the deductions taken 

by Rite Aid in February 1999 were for damaged and outdated products. 

According to the order, Mr. Noonan participated in activities that 

caused Rite Aid to process these unauthorized markdowns. Based on these 

activities, SEC charged that Mr. Noonan committed or caused violations 

of Sections 10(b) of the Exchange Act and Rule 10b-5 thereunder, and 

caused violations by Rite Aid of Sections 13(a) and 13(b)(2) of the 

Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. Based on 

the cooperation extended to SEC, SEC deemed it appropriate to issue a 

cease-and-desist order.



In June 2002, SEC filed a separate complaint against Mr. Bergonzi, Rite 

Aid’s CFO from March 1995 to January 1999; Franklin C. Brown, executive 

vice president and chief legal counsel from April 1993 to July 1997 

(served as vice chairman of the board until May 2000); and Mr. Grass, 

CEO and chairman of the board from March 1995 until his resignation on 

October 18, 1999. According to the complaint, Messrs. Bergonzi, Brown, 

and Grass were controlling persons of Rite Aid for the purposes of 

Section 20(a) of the Exchange Act. According to SEC’s complaint, 

Messrs. Bergonzi, Brown, and Grass received ill-gotten gains in the 

form of performance-related cash bonuses totaling more than $1.5 

million:



The SEC complaint alleged that at the direction of Mr. Bergonzi, Rite 

Aid’s accounting staff recorded numerous and varied types of accounting 

entries that had no basis or false substantiation and/or were in 

violation of GAAP. SEC stated that these transactions were generally 

made at the end of or just after a quarterly or yearly period. SEC 

charged all three with financial fraud, fraudulent periodic reports and 

registration statements; fraudulent proxy statements and press 

releases; fraudulent misrepresentations in connection with stock 

pledges (violations of Section 17(a) of the Securities Act of 1933, and 

Section 10(b) of the Exchange Act, and Rule 10(b)-5 thereunder); 

falsification of corporate books and records and circumvention of 

internal controls (violations of Section 13(b)(5) of the Exchange Act, 

and Rule 13b2-1 thereunder); misrepresentations to accountants 

(violations of Exchange Act Rule 13b2-2, 17 C.F.R. §240.13b2-2); 

periodic reporting violations (violations of Sections 13(a) of the 

Exchange Act, and Rules 12b-20 and 13a-1, thereunder); and corporate 

recordkeeping and internal control violations (Section 13(b)(2) of the 

Exchange Act). Mr. Bergonzi was also charged as a controlling person 

with quarterly reporting violations (violations of Section 13(a) of the 

Exchange Act, and Rules 12b-20 and 13a-13, thereunder). Mr. Grass and 

Mr. Brown, as controlling persons of Rite Aid, were also charged with 

current reporting violations and proxy statement violations (Sections 

13(a) of the Exchange Act, and Rules 12b-20 and 13a-11 thereunder), and 

Section 14(a) of the Exchange Act, and Rule 14a-9(a) thereunder.



SEC is seeking against Messrs. Bergonzi, Brown, and Grass a permanent 

injunction, disgorgement of ill-gotten gains, civil money penalties, 

and officer and director bars.



The U.S. Attorney of the Middle District of Pennsylvania also announced 

related criminal charges against Messrs. Bergonzi, Brown, and Grass 

including mail fraud, wire fraud, conspiracy and lying to SEC.



[End of section]



Appendix XIV: Safety-Kleen Corporation:



Business Overview:



Safety-Kleen Corporation (Safety-Kleen) is an industrial and hazardous 

waste management company in North America. The company provides a range 

of services designed to collect, transport, process, recycle, or 

dispose of hazardous and nonhazardous industrial and commercial waste. 

As of May 1, 2001, the company had over 9,600 employees.



On June 9, 2000, Safety-Kleen and 73 of its domestic subsidiaries 

voluntarily filed for protection under Chapter 11 of the U.S. 

Bankruptcy Code. Safety-Kleen is in the process of reorganizing.



Restatement Data:



According to Safety-Kleen’s filings with the Securities and Exchange 

Commission (SEC or Commission), on March 6, 2000, Safety-Kleen’s board 

of directors received information alleging possible accounting 

irregularities that may have affected previously reported financial 

results. On March 6, 2000, the company announced that it had initiated 

an internal investigation of its previously reported results and 

certain of its accounting policies and practices. Specifically, the 

investigation focused on accounting irregularities, including improper 

revenue recognition, inappropriate recognition of gain on derivatives 

transactions, inappropriate capitalization of costs, and insufficient 

liability accruals. The board’s independent directors headed the effort 

and hired Shaw Pittman and Arthur Andersen LLP to conduct the 

investigation. The investigation ultimately led to the July 9, 2001, 

restatement of previously reported earnings for fiscal years 1997 

through 1999, which decreased its previously reported earnings by $534 

million (table 18).



Table 18: Selected Financial Results, 1997-1999:



Dollars in millions.



Revenues, as reported; Fiscal year 1997: $679; Fiscal year 1998: 

$1,186; Fiscal year 1999: $1,686.



Revenues, as restated; Fiscal year 1997: 642; Fiscal year 1998: 

1,173; Fiscal year 1999: 1,624.



Net income (loss), as reported; Fiscal year 1997: (183); Fiscal 

year 1998: .205; Fiscal year 1999: 89.



Net income (loss), as restated; Fiscal year 1997: (302); Fiscal 

year 1998: (103); Fiscal year 1999: (223).



Source: SEC filings.



[End of table]



Accounting/Audit Firm:



PricewaterhouseCoopers LLP (PwC) was the independent auditor during the 

periods in question. On March 8, 2000, PwC notified the company by 

letter that it was withdrawing its previously issued reports on the 

financial statements of the company for the fiscal years ending August 

31, 1997, 1998, and 1999. PwC further stated that such reports should 

no longer be relied upon or associated with the company’s financial 

statements for such years. On August 1, 2000, Safety-Kleen dismissed 

PwC and engaged Arthur Andersen LLP as its new independent accountant.



Stock Price:



The company’s common stock traded on the New York Stock Exchange (NYSE) 

under the ticker symbol SK until it was suspended from trading in June 

2000 and was ultimately delisted on July 28, 2000. As of June 15, 2000, 

the company now trades over the counter under the ticker symbol SKLNQ. 

The company’s stock price generally declined from December 1999 through 

February 2000 (fig. 21). Specifically, the stock price increased over 

20 percent on December 17, 1999, following an analyst’s recommendation 

earlier in the week. But this was quickly reversed as Safety-Kleen 

reported earnings that were below market expectations on January 5, 

2000, and the stock price fell almost 30 percent. The trend remained 

negative through February 2000. Then on March 6, 2000, the date of the 

announcement of the preliminary internal investigation, Safety-Kleen’s 

stock price fell 45 percent from the previous day’s close of $3.63, to 

close at $2.00. On March 13, 2000, the company announced that it had 

been advised by SEC staff that a formal investigation of the company 

had been initiated. The next day, the company’s stock price fell once 

again to $1.06 per share, from its previous trading day’s closing price 

of $2.06 per share. The trend generally remained negative, with the 

stock remaining under $1 per share until it was suspended from NYSE at 

$0.625 after the close on June 9, 2000.



Figure 21: Daily Stock Prices for Safety-Kleen, September 1, 1999-June 

9, 2000:



[See PDF for image]



Source: GAO’s analysis of NYSE Trade and Quote data.



[End of figure]



Securities Analysts’ Recommendations:



Based on historical analyst recommendations that we were able to 

identify, prior to the March 6, 2000, restatement announcement, four 

firms rated Safety-Kleen. One recommended it as a moderate buy and the 

other three recommended a hold. After the restatement, the same firms 

changed the company’s recommendation from moderate buy to hold. Also, 

one firm lowered its recommendation on Safety-Kleen from market 

outperform to market perform.



Credit Rating Agency Actions:



Moody’s Investors Service, Inc. (Moody’s) and Standard and Poor’s rated 

Safety-Kleen’s debt. On May 7, 1999, before the restatement, Moody’s 

assigned rating for Safety-Kleen indicated that its debt generally 

lacked desirable characteristics and assurance of interest and 

principal payments or maintenance of other terms of the contract over 

any long period of time. However, the company’s outlook was considered 

stable. On September 13, 1999, before the restatement, Standard and 

Poor’s assigned Safety-Kleen a slightly higher rating but rated the 

company’s outlook as negative. On the announcement date of March 13, 

2000, Standard and Poor’s downgraded the company’s rating, which 

indicated that it considered Safety-Kleen’s obligations to be more 

vulnerable to nonpayment than previously. On March 10, 2000, Moody’s 

changed its previous rating on Safety-Kleen’s outlook from stable to 

negative and lowered Safety-Kleen’s credit ratings for most of its 

debt. Subsequently, Standard and Poor’s downgraded Safety-Kleen’s debt 

rating on April 18, 2000, May 16, 2000, and ultimately removed the 

company from its rating list on July 26, 2000, and classified it as 

“not rated.”



Legal and Regulatory Actions Taken:



On June 9, 2000, Safety-Kleen and 73 of its domestic subsidiaries 

voluntarily filed for protection under Chapter 11 of the U.S. 

Bankruptcy Code.[Footnote 117]



In the Spring of 2000, Safety-Kleen and certain officers and directors 

were named in various class actions brought by holders of its 

securities. The lawsuits charge, among other things, that the 

defendants made or caused materially false and misleading financial 

statements regarding the company’s financial condition. Cases brought 

by shareholders were consolidated. Certain bond holders subsequently 

filed a class action against the company and PwC on the same grounds.



In March 2000, shortly after the company’s announcement of an internal 

investigation of its previously reported results and certain of its 

accounting policies and practices, Safety-Kleen announced that SEC had 

initiated a formal investigation into the company. The U.S. Attorney 

for the Southern District of New York also initiated an investigation 

into Safety-Kleen for accounting irregularities. According to Safety-

Kleen, as of March 28, 2002, the company has responded to subpoenas 

issued by SEC and the grand jury in New York and is cooperating with 

both ongoing investigations.



[End of section]



Appendix XV: SeaView Video Technology, Inc.:



Business Overview:



SeaView Videdo Technology, Inc., (SeaView) manufactures and sells 

underwater video cameras, lighting, and accessories for the marine, 

consumer retail, and commercial markets. It is also engages in the 

development, marketing, and sale of proprietary video security network 

devices and consumer electronic products that utilize patented 

technologies, licensed by the company, to retailers, commercial 

businesses and original equipment manufacturers throughout the United 

States. The company was originally incorporated as Gopher, Inc., in 

Utah on April 16, 1986. In order to change its domicile, Gopher, Inc., 

was reorganized under the laws of Nevada on December 30, 1993. On March 

24, 1999, the company entered into a reorganization agreement with 

SeaView Underwater Research, Inc., a privately held Florida 

corporation. On February 2, 2000, the company changed its name to 

SeaView Video Technology, Inc. As of December 31, 2001, SeaView had net 

revenues of $732,401 and employed about 20 people.



Restatement Data:



SeaView made two restatement announcements. The first restatement 

announcement was made on March 19, 2001, during an internal review of 

fiscal year 2000 operations that was undertaken by its newly hired 

chief financial officer (CFO). SeaView’s original Form 10-Q for the 

quarters ended June 30 and September 30, 2000, incorrectly included as 

revenues and accounts receivable approximately $1.2 million and $2.3 

million, respectively, of purchase orders that were received for new 

security camera products but were not shipped to the customers in time. 

After the restatement, the second and third quarter net revenues were 

approximately $335,120 and $212,592, respectively (table 19). The 

restatement also included a reduction in liabilities, totaling 

approximately $849,235, which were previously recorded relating to the 

purchase orders that were erroneously included as revenues. This 

restatement resulted in a reduction of net income by approximately 

$966,957 for the quarter ended June 30, 2000, and by approximately 

$871,639 for the quarter ended September 30, 2000. Net income was 

overstated by 468 percent during the 6-month period. The financials 

were restated on April 16, 2001.



Second, on April 16, 2002, SeaView again announced and restated its 

financial statements, this time for the full year 2000, to provide 

valuation allowances of over $1.4 million against deferred tax assets 

principally related to net tax operating loss carry forwards. Net 

income was overstated by about 65 percent during the 1-year period 

(table 19). The 2000 financial statements were also restated to reduce 

the original valuation of an equity investment from almost $1.03 

million to $146,200. The original valuation was based upon a discounted 

value of the company’s common stock that the former chief executive 

officer (CEO), Richard L. McBride, personally committed in exchange for 

the equity investment.



Table 19: Selected Financial Data, 2000:



(Dollars in thousands).



Net revenues, as reported; Second quarter fiscal year 2000: $1,519; 

Third quarter fiscal year 2000: $2,465; Fiscal year 2000: $1,131.



Net revenues as restated; Second quarter fiscal year 2000: 335; Third 

quarter fiscal year 2000: 213; Fiscal year 2000: N/A.



Net income (loss), as reported; Second quarter fiscal year 2000: 177; 

Third quarter fiscal year 2000: 216; Fiscal year 2000: (2,204).



Net income (loss), as restated; Second quarter fiscal year 2000: (790); 

Third quarter fiscal year 2000: (656); Fiscal year 2000: (3,644).



Total assets, as reported; Second quarter fiscal year 2000: 3,154; 
Third 

quarter fiscal year 2000: 5,938; Fiscal year 2000: 3,842.



Total assets, as restated; Second quarter fiscal year 2000: 2,473; 
Third 

quarter fiscal year 2000: 3,808; Fiscal year 2000: 1,521.



Total liabilities, as reported; Second quarter fiscal year 2000: --; 

Third quarter fiscal year 2000: 1,232; Fiscal year 2000: N/A.



Total liabilities as restated; Second quarter fiscal year 2000: N/A; 

Third quarter fiscal year 2000: 383; Fiscal year 2000: N/A.



Note: N/A represents not applicable.:



Source: SEC filings.



[End of table]



Accounting/Audit Firm:



Carol McAtee, CPA (Carol McAtee) was the independent accountant during 

the relevant period and had served as the company’s principal 

accountant since January 2000. On March 21, 2002, with the approval of 

the board of directors, SeaView dismissed Carol McAtee and engaged 

Aidman, Piser & Company P.A. as its independent accountant to audit the 

financial statements. On April 30, 2001, Carol McAtee sent a letter to 

the audit committee and management of SeaView stating that certain 

deficiencies existed with the internal control design of the company, 

which in the opinion of Carol McAtee could affect the company’s ability 

to record, process, summarize, and report financial data consistent 

with the assertions of management in the financial statements. As a 

result of these internal control deficiencies, several unspecified 

audit adjustments were proposed and recorded to SeaView’s financial 

statements for the fiscal year ended December 31, 2000.



Stock Price:



SeaView’s common stock trades over-the-counter under the ticker symbol 

SEVU. The stock traded at over $11 per share in early November 2000, 

but it fell sharply to around $2 by January 2001. According to press 

reports, the announcement of complications in its negotiations to sell 

$80 million worth of equipment preceded the decline; and in a letter to 

shareholders, SeaView’s CEO blamed the sharp drop on short sellers. 

SeaView’s stock price recovered slightly. On February 20, 2001, the CEO 

stepped aside. On March 19, 2001, the stock price fell nearly 33 

percent after SeaView announced that it would have to restate the 

second and third quarter financial results from the year 2000 (fig. 

22). The stock price fell for much of 2001, generally trading below 

$0.50 per share by December 2001. The stock price suddenly peaked at 

$1.30 on October 11, 2001, several days after the death of the former 

CEO. The stock price then continued to fall and by SeaView’s April 16, 

2002, announcement that it would once again restate its financial 

statements, the stock price closed at $0.22 per share. From the time of 

SeaView’s restatement announcement on March 19, 2001, to the issuance 

of its second restatement on April 16, 2002, SeaView’s stock price fell 

over 80 percent from almost $1.12 to $0.22. As of June 28, 2002, the 

stock closed at $0.20.



Figure 22: Daily Stock Prices for SeaView, September 1, 2000-June 28, 

2002:



[See PDF for image]



Source: GAO’s analysis of Nasdaq data.



[End of figure]



Securities Analysts’ Recommendations:



No information found.



Credit Rating Agency Actions:



No information found.



Legal and Regulatory Actions Taken:



SeaView was subject to shareholder and regulatory action related to its 

accounting practices. SeaView was a defendant in a consolidated class-

action lawsuit in the U. S. District Court for the Middle District of 

Florida against the company and Mr. McBride, SeaView’s former CEO.



Beginning in May 2001, plaintiffs filed five almost identical class-

action lawsuits against SeaView and the company’s president and CEO, 

Mr. McBride alleging that, among other things, from March 30, 2000, to 

March 19, 2001, SeaView and Mr. McBride misstated the company’s sales 

and revenue figures; improperly recognized revenues; misrepresented the 

nature and extent of the company’s dealer network; falsely touted 

purported sales contracts and agreements with large retailers; 

misrepresented the company’s ability to manufacture, or to have 

manufactured, its products; and misrepresented SeaView’s likelihood of 

achieving certain publicly announced sales targets. On July 24, 2001, 

those lawsuits were consolidated and the consolidated amended class-

action complaint was filed in December 2001.



On July 1, 2002, SeaView and the lead counsel for the plaintiffs 

executed a memorandum of understanding, setting forth the basic terms 

of a settlement in the consolidated class-action lawsuit. The principal 

terms of the settlement require SeaView to tender to the plaintiffs, 

after the effective date of the settlement, 6,000,000 shares of SeaView 

common stock, which can be freely traded for the benefit of the class. 

SeaView will also pay up to $125,000 for costs incurred by the 

plaintiffs in this litigation, plus costs of settlement notice and 

administration.



According to SeaView’s 2001 annual report, SEC initiated an 

investigation into unspecified matters related to SeaView’s financial 

results and common stock performance during 2000. To date, SEC has not 

initiated action against SeaView or its officials.



[End of section]



Appendix XVI: Shurgard Storage Centers, Inc.:



Business Overview:



As of December 31, 2001, Shurgard Storage Centers, Inc. (Shurgard) is 

one of the largest owners and operators in the self-storage industry, 

with 479 properties under management in 21 states as well as Belgium, 

Denmark, France, the Netherlands, United Kingdom, and Sweden. With more 

than 1,000 employees, it is organized as a fully integrated real estate 

investment trust, which means the company develops, acquires, owns, 

leases, and manages its own storage centers. As of December 31, 2001, 

the company had revenues of $232.6 million and real estate operations 

accounted for about 97 percent of total revenues.



Restatement Data:



On November 8, 2001, Shurgard announced the postponement of its 

previously announced third-quarter earnings. Its independent auditor, 

Deloitte & Touche LLP (Deloitte), informed the audit committee of the 

board of directors of its change in advice regarding the accounting 

treatment of four joint ventures the company had entered into since 

1998. According to Deloitte, the proposed change in accounting 

treatment would require restatement of the company’s financial 

statements for 1998, 1999, 2000, and the first 6 months of 2001. 

According to Shurgard officials, after notification of the auditor’s 

change in opinion regarding the accounting treatment for the 

development joint ventures, the company submitted the proposed new 

accounting treatment to the Office of the Chief Accountant (OCA) of the 

Securities Exchange Commission (SEC).[Footnote 118] Prior to the 

company filing restated financial statements, OCA advised the company 

that it did not object to the proposed new accounting treatment for the 

joint ventures. The company believed that the restatement would result 

in a material adverse impact on previously reported income. On December 

4, 2001, Shurgard announced that it had amended its annual report for 

fiscal year ended December 31, 2000 (table 20).



Table 20: Selected Financial Data, 1998-2001:



(Dollars in millions).



Net income, as reported; Fiscal year 1998: $44.7; Fiscal year: $50.7; 

Fiscal year: $52.6; First quarter 2001: $10.7; Second quarter 2001: 

$15.7.



Net income, as restated; Fiscal year 1998: 35.2; Fiscal year: 36.6; 

Fiscal year: 32.3; First quarter 2001: 4.1; Second quarter 2001: 10.0.



Source: SEC filings.



[End of table]



Shurgard agreed with its independent auditor that the four joint 

venture arrangements entered into from 1998 to 2000 should have been 

accounted for as financing arrangements from inception. However, these 

arrangements were previously included in Shurgard’s consolidated 

statements and the ventures partners’ share of the operating results 

were reflected as minority interest in the consolidated statements. The 

excess of the repurchase price of the joint venture properties over the 

original sales prices to the joint venture was capitalized in a manner 

similar to the acquisition of minority interests. It was also 

determined that the company had not appropriately changed its method of 

accounting for the participation features included in a mortgage loan 

assumed.



Accounting/Audit Firm:



Deloitte was the company’s independent auditor during the relevant 

period.



Stock Price:



Shurgard’s stock is traded on the New York Stock Exchange (NYSE) under 

the ticker symbol SHU. The stock price trended slightly higher from May 

2001 until November 2001 (fig. 23). On November 7, 2001, the date 

before the restatement announcement, the stock price closed at $30.76. 

On the day of the restatement announcement, the stock price closed at 

$29.38, a loss of around 4.5 percent. The following day, the stock 

price closed at $29.78. The announcement of the restatement appeared to 

have little longer-term impact on the stock price, as it continued its 

upward trend through April 2002 and closed in the mid-thirties.



Figure 23: Daily Stock Prices for Shurgard, May 1, 2001-April 30, 2002:



[See PDF for image]



Source: GAO’s analysis of NYSE Trade and Quote data.



[End of figure]



Securities Analysts’ Recommendations:



Based on available historical securities analysts rating information we 

identified, we found that five analysts that covered Shurgard from 2000 

through 2001. A few months prior to the November 8, 2001, restatement 

announcement, one analyst upgraded the company’s rating from neutral to 

outperform. One analyst downgraded Shurgard’s rating (from hold to 

sell) on November 8, 2001, following its restatement announcement.



Credit Rating Agency Actions:



The company’s securities are rated by Moody’s Investors Service, Inc. 

(Moody’s) and Standard and Poor’s. On April 29, 1997, Standard and 

Poor’s rating of Shurgard’s senior unsecured debt and preferred stock 

indicated that the obligations generally have adequate protection 

measures, but that adverse economic conditions or changing 

circumstances are more likely to lead to a weakened capacity of the 

company to fulfill its financial commitment on the debt. On February 

14, 2001, Shurgard’s debt received a medium-grade debt rating from 

Moody’s, which indicated that the bonds are neither highly protected 

nor poorly secured and are ranked mid-range. In addition, principal and 

interest payments appear adequate for the present, but the long-term 

certain protective elements may be lacking. This rating remained 

unchanged throughout 2001. As of August 2002, Standard and Poor’s had 

not changed its rating since 1997.



Legal and Regulatory Actions Taken:



To date, there has been no civil or regulatory action taken with regard 

to Shurgard’s restatement announcement.



[End of section]



Appendix XVII: Sunbeam Corporation:



Business Overview:



Sunbeam Corporation (Sunbeam) designs, manufactures, markets and 

supplies branded consumer products. The company’s product categories 

include appliances, health care, personal care and comfort, and camping 

products. Appliances include mixers, blenders, food steamers, toasters, 

irons and garment steamers. The significant trademarks of the company 

are Sunbeam, Coleman, Oster, Mr. Coffee, Health O Meter, First Alert, 

Campingaz, and Powermate. Outdoor leisure accounted for 40 percent of 

1999 revenues; household appliances, 35 percent; and international 

sales, 25 percent. On February 6, 2001, Sunbeam filed for bankruptcy 

protection under Chapter 11. On September 9, 2002, a reorganization 

plan was filed with the bankruptcy court and a hearing for the company 

to emerge from bankruptcy will be held on November 4, 2002.



Restatement Data:



Around year-end 1996, Sunbeam created accounting reserves, which 

increased Sunbeam’s reported loss for 1996. According to the Securities 

and Exchange Commission (SEC or Commission) complaint, filed May 15, 

2001, these reserves were then allegedly used to inflate income in 

1997, thus contributing to the false picture of a rapid turn around.



On June 30, 1998, Sunbeam announced that the audit committee of the 

board of directors would conduct a review of Sunbeam’s prior financial 

statements. Sunbeam also announced that Deloitte & Touche LLP had been 

retained to assist the audit committee and Arthur Andersen LLP (Arthur 

Andersen) in its review of Sunbeam’s prior financial statements. On 

August 6, 1998, Sunbeam announced that the audit committee had 

determined that Sunbeam would be required to restate its financial 

statements for 1997, the first quarter of 1998 and possibly 1996, and 

that the adjustments, while not then quantified, would be material. 

Sunbeam announced on October 20, 1998, the restatement of its financial 

results for a 6-quarter period from the fourth quarter of 1996 through 

the first quarter of 1998. The restatement reduced the 1996 net loss by 

$20 million (9 percent of reported losses); it reduced 1997 net income 

by $71 million (65 percent of reported earnings); and it increased 1998 

earnings by $10 million (21 percent of reported losses). See table 21.



Table 21: Selected Financial Data, 1996 - 1998:



Affected financial data:



Dollars in millions; 



Net income (loss), as reported; Fiscal year 1996, $(228.3); Fiscal year 

1997, $109.4; Fiscal Year 1998, $(44.6).



Net income (loss), as restated; Fiscal year 1996, (208.5); Fiscal year 

1997, 38.3; Fiscal Year 1998, (54.1).



Source: SEC filings.



[End of table]



The incorrectly reported numbers affected numerous accounts. Sunbeam 

concluded, based upon its review, that for certain periods revenue was 

incorrectly recognized (principally “bill and hold” and guaranteed 

sales transactions), certain costs and allowances were not accrued or 

were incorrectly recorded (principally allowances for sales returns, 

co-op advertising, customer deductions and reserves for product 

liability and warranty expense), and certain costs were incorrectly 

included in and charged to restructuring, asset impairment and other 

costs.



Accounting/Audit Firm:



Arthur Andersen was the independent auditor and wrote unqualified 

opinions for Sunbeam, although Arthur Andersen’s engagement partner, 

Phillip Harlow, was allegedly aware of Sunbeam’s accounting 

improprieties and disclosure failures. On May 15, 2001, Mr. Harlow was 

charged with fraud along with Sunbeam’s former senior management team, 

led by Mr. Albert J. Dunlap, chairman of the board. The suit is still 

pending. Details are provided in the “Legal and Regulatory Actions 

Taken” section of this case.



Stock Price:



Sunbeam stock was traded on the New York Stock Exchange (NYSE) under 

the ticker symbol SOC. However, on February 6, 2001, NYSE suspended 

trading of Sunbeam stock and subsequently delisted the company in 2001. 

It currently trades over the counter as SOCNQ. On March 4, 1998, 

Sunbeam stock hit a high of $52 per share (fig. 24). The stock price 

fell over 9 percent on March 19 after Sunbeam issued a profit warning; 

then on April 3, 1998, the stock price fell another 25 percent to $34 

after Sunbeam issued a second profit warning. The stock continued to 

fall through April and May 1998. Following a June 8, 1998, article in 

Barron’s suggesting that Sunbeam engaged in “accounting gimmickry,” the 

reports of an SEC inquiry, and the firing of Mr. Dunlap, the stock 

declined from over $20 per share to under:



$10 per share by July 1998. By the date of the financial restatement 

announcement on June 30, 1998, the stock price closed at $10.375. The 

stock price continued its generally downward trend in late 1998.



Figure 24: Daily Stock Prices for Sunbeam, December 1, 1997-December 

31, 1998:



[See PDF for image]



Source: GAO’s analysis of NYSE Trade and Quote data.



[End of figure]



Securities Analysts’ Recommendations:



Based on historical analysts’ recommendations we were able to 

identifiy, in mid-1997, in the middle of Sunbeam’s stock price 

appreciation, analysts were touting Sunbeam as a future leader in the 

industry. One analyst’s earnings estimate was $1.55 per share in 1997 

and $2.25 per share in 1998. Analysts speculated that Sunbeam’s 

earnings could reach $3 per share in 1999. The actual earnings based on 

SEC filings were $0.62 per share, a loss of $7.99 per share, and a loss 

of $2.97 for 1997, 1998, and 1999, respectively.



Based on news in April 1998 that sales would be down for the first 

quarter of 1998, one firm downgraded the company’s stock. After the 

restatement warning in June 1998, another firm downgraded its rating to 

a sell.



Credit Rating Agency Actions:



Moody’s Investors Service, Inc. (Moody’s) and Standard and Poor’s rated 

Sunbeam’s debt. On June 16, 1998, two weeks prior to Sunbeam’s 

restatement announcement on June 30, 1998, Moody’s assigned a poor 

rating to Sunbeam’s zero coupon convertible senior subordinated notes. 

They did not take action after the restatement announcement. Standard 

and Poor’s withdrew Sunbeam’s issuer credit rating on August 15, 1992. 

Therefore, it did not rate Sunbeam at the time the company restated its 

financial statements or declared bankruptcy on February 6, 2001:



Legal and Regulatory Actions Taken:



On February 6, 2001, Sunbeam filed for Chapter 11 bankruptcy protection 

under U.S. Bankruptcy Court.[Footnote 119]



In January 1999, a consolidated class-action lawsuit against Sunbeam, 

its auditor, Arthur Andersen, and Sunbeam principals was filed in the 

U.S. District Court for the Southern District of Florida. The complaint 

alleged that, among other things, from March 19, 1998, through April 3, 

1998, Sunbeam and the chief executive officer (CEO) of the company, 

Albert Dunlap, violated the federal securities laws (Sections 10(b) and 

20(a) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 

10b-5) by, among other things, misrepresenting and/or omitting material 

information concerning the business operations, sales and future 

prospects of the company. The suit reached final settlement on August 

9, 2002. Sunbeam was not a party in the final settlement due to its 

previous bankruptcy filing. The total settlement amount was $141 

million. The largest portion came from Sunbeam’s accountant at the 

time, Arthur Andersen, which agreed to pay $110 million in April 2001. 

Since that time the money has been held in escrow earning interest, 

pending the final settlement with Sunbeam. Mr. Dunlap, the former CEO, 

also paid $15 million. Another portion of the settlement came from the 

Chubb Group’s Executive Risk Indemnity Inc. ($13.5 million), and Great 

American Insurance Group ($2 million). Both firms had policies covering 

Sunbeam officials.



On May 15, 2001, SEC filed a civil action in the U.S. District Court of 

Miami against five former officers of Sunbeam (Mr. Dunlap, chairman and 

CEO; Russell Kersh, chief financial officer (CFO); Robert Gluck, chief 

accounting officer; Donald R. Uzzi and Lee B. Griffith, former vice 

presidents) and Phillip Harlow, former Arthur Andersen engagement 

partner. On May 15, 2001, SEC also instituted an administrative 

proceeding against Sunbeam, which was concurrently settled. The 

complaint charged Sunbeam with filing false and misleading reports with 

the Commission from the fourth quarter of 1996 through the first 

quarter of 1998. Sunbeam consented to the entry of a cease-and-desist 

order prohibiting future violations of the antifraud, reporting, books 

and records, and internal controls provisions of the securities laws. 

Finally, an administrative action was also filed and concurrently 

settled against David Fannin, former Sunbeam general counsel, for 

participating in drafting misleading press releases on the company’s 

operations.



The civil complaint alleges that Messrs. Dunlap and Kersh, together 

with others, employed improper accounting techniques and undisclosed 

nonrecurring transactions to misrepresent Sunbeam’s results of 

operations. According to SEC’s complaint, through this conduct, Messrs. 

Dunlap and Kersh, personally and as controlling persons within the 

meaning of Section 20(a) of the Exchange Act, and Messrs. Gluck and 

Griffith violated or aided and abetted violations of Section 17(a) of 

the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A), 

13(b)(2)(B) and (with the exception of Mr. Dunlap) 13(b)(5) of the 

Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13b2-1, and 13b2-

2 thereunder; and Messrs. Uzzi and Harlow violated or aided and abetted 

violations of all of the above provisions, except Exchange Act Rule 

13b2-2. SEC seeks, permanent injunctions against all defendants for 

future violations of the above provisions of the securities laws and 

civil penalties and, in the case of Messrs. Dunlap, Kersh, Gluck, and 

Uzzi, seeks permanent bars from acting as an officer or director of any 

public company.



On September 4, 2002, Messrs. Dunlap and Kersh agreed to settle their 

cases with SEC, while not admitting or denying guilt. Mr. Dunlap paid 

$500,000 in the settlement and Mr. Kersh paid $200,000. Both agreed to 

be barred permanently from serving as an officer of a public company. 

The civil suit is still pending against the other officers, and a trial 

is set for mid-January 2003.



[End of section]



Appendix XVIII: Thomas & Betts Corporation:



Business Overview:



Thomas & Betts Corporation (Thomas & Betts) is a designer, 

manufacturer, and marketer of electrical components and systems for 

connecting, fastening, protecting, and identifying wires, components, 

and conduits. As of December 31, 2000, the company had reported net 

sales of $1.76 billion and it employed approximately 14,000 people.



Restatement Data:



Thomas & Betts announced planned restatements to its financial 

statements in 1999 and again in 2000. First, on October 26, 1999, 

Thomas & Betts announced that it might restate the first and second 

fiscal quarters 1999 and prior fiscal years. Upon review with its 

independent auditors, KPMG LLP, and after review and consultation with 

the audit committee of its board of directors, Thomas & Betts decided 

to restate its previously issued financial statements for quarters 

ended April 4, 1999, and October 3, 1999. In November 1999, Thomas & 

Betts filed its Form 10-Q with the Securities and Exchange Commission 

(SEC or Commission). On December 20, 1999, Thomas & Betts announced 

that it has completed its previously reported review of certain 

accounting matters, which has largely resulted from or had been 

identified by conversions of its worldwide financial systems. As a 

result of that review, the company concluded, with the concurrence of 

KPMG LLP that attribution of adjustments to the first and third 

quarters of 1999 as previously announced should be modified. That 

modification resulted in a $2.2 million increase in first-quarter net 

earnings and a $3.1 million decrease in third-quarter net earnings from 

amounts disclosed in the company’s Form 10-Q filed November 17, 1999. 

Consequently, a revised Form 10-Q (amended) was filed for the first and 

third quarters reflected net income for the first quarter of 1999 of 

$34.5 million and net income for the third quarter of 1999 of $46.9 

million.



To address poor performance, Thomas & Betts initiated several key 

management changes. It hired a new chief financial officer (CFO) and 

elected a new chairman and chief executive officer (CEO). During 2000, 

the new management team began a comprehensive review of processes, 

controls and systems. As a result of these reviews, management 

identified, primarily in the second quarter of 2000, certain prior-

period adjustments, which necessitated a restatement of its financial 

statements for the first and second quarters of 2000 and previous 

quarters. On August 21, 2000, Thomas & Betts announced that it had 

recorded certain special charges as of July 2, 2000. It also announced 

that while the charges were based on the best available information, 

management was continuing to review with its independent auditors the 

amounts and attribution of the special charges to the appropriate 

reporting periods. Although the review was ongoing, Thomas & Betts 

announced that it planned to restate its financial statements for 1999. 

Since a portion of these special charges recorded in the second quarter 

2000 were attributable to fiscal 1999, adjustments had to be made in 

fiscal 1999 and the second quarter of 2000. Upon completion of the 

review, on March 29, 2001, the company filed its Form 10-K for fiscal 

year 2000 with SEC, which contained restated financials for fiscal 

years 1996 through 1999, all four quarters of fiscal 1999, and the 

first two quarters of fiscal 2000 (see table 22).



Table 22: Selected Financial Data, 1996-2000:



(Dollars in millions).



Net sales, as reported; Fiscal year 1996, $2,134.4; Fiscal year 1997, 

$2,259.5; Fiscal Year 1998, $2,230.4; Fiscal year 1999, $2,522.0; 

First quarter fiscal year 2000, $462.9; Second quarter fiscal year 
2000, 

$285.5.



Net sales, as restated; Fiscal Year 1996, 2,130.3; Fiscal year 1997, 

2,248.2; Fiscal Year 1998, 2,212.2; Fiscal year 1999, 2,467.4; 

First quarter fiscal year 2000, 449.4; Second quarter fiscal year 2000,

200.1.



Net income (loss), as reported; Fiscal year 1996, 73.5; Fiscal year

1997, 162.3; Fiscal year 1998, 87.5; Fiscal year 1999, 148.3; First 

quarter fiscal year 2000, 35.9; Second quarter fiscal year 2000,

(36.8).



Net income, as restated; Fiscal year 1996, 68.1; Fiscal Year 1997, 

148.3; Fiscal year 1998, 81.2; Fiscal year 1999, 119.3; First quarter 

fiscal year 2000, 23.3; Second quarter fiscal year 2000, 21.4.



Note: Restated net sales does not included reclassification adjustments 

made to implement Emerging Task Force Issue No. 00-10, “Accounting for 

Shipping and Handling Fees and Costs,” or adjustments for discontinued 

operations.



Source: SEC filings.



[End of table]



Accounting/Audit Firm:



KPMG LLP was the independent auditor during the restatement period.



Stock Price:



The company’s stock trades on the New York Stock Exchange (NYSE) under 

the ticker symbol TNB. The stock price of Thomas & Betts fluctuated 

around the mid-$40 range from April through August 1999 (fig. 25). The 

stock price peaked at over $53 in mid-September following the company’s 

decision to drop out of the bidding for a rival cable manufacturer. The 

stock price closed at $45.625 on October 26, 1999, down slightly from 

the previous close of $46.50, after reporting third quarter earnings 

that were consistent with analysts’ expectations and announcing the 

restatement. The stock price generally trended downward over the next 

month, ending November 1999 at $41.00. On December 15, 1999, a 

brokerage firm downgraded Thomas & Betts sending the stock price down 

almost 30 percent from $39.188 to $27.875.



Figure 25: Daily Stock Prices for Thomas & Betts, April 1, 1999 - April 

30, 2000:



[See PDF for image]



Source: GAO’s analysis of NYSE Trade and Quote data.



[End of figure]



On June 19, 2000, Thomas & Betts reported that it expected second 

quarter earnings to come in significantly below the current analyst 

consensus of $0.74 per share, excluding an anticipated gain on the sale 

of the company’s electronic original equipment manufacturer business. 

The company stated that the expected earnings decrease would primarily 

result from a likely increase in provisions for sales and accounts 

receivable deductions. On June 19, 2000, the stock price closed at 

$26.81, and the following day closed at $19.18, a decline of more than 

28 percent (fig. 26). On August 14, 2000, the company’s stock price 

closed at $20.06. By the end of that week, it closed at $20.00, 

virtually unchanged. On Monday of the following week (August 21, 2000), 

Thomas & Betts announced its planned restatement, and its stock price 

closed at $19.38. The next day, it declined further to $18.94, a 

decline of about 5 percent over these 3 days.



Figure 26: Daily Stock Prices for Thomas & Betts, February 1, 2000-

February 28, 2001:



[See PDF for image]



Source: GAO’s analysis of NYSE Trade and Quote data.



[End of figure]



Securities Analysts’ Recommendations:



Based on available historical information on securities analyst 

ratings, in the months preceding the August 2000 restatement 

announcement, one firm lowered its investment recommendation from a buy 

to market performance. In November 2000, and twice in 2001, one firm 

cut its earnings estimates for the company. Another firm in 2001 also 

cut Thomas & Betts’s earnings estimate. And in July 2001, several 

months after the restated financials were filed with SEC, one brokerage 

firm downgraded its recommendation to market perform.



Credit Rating Agency Actions:



Thomas & Betts’s debt is rated by Moody’s Investors Service, Inc. 

(Moody’s) and Standard and Poor’s. In August 2000, Moody’s debt rating 

for the company indicated that Thomas & Betts’s obligations were 

neither highly protected nor poorly secured and lacked outstanding 

investment characteristics. From August 2000 and throughout 2001, 

Moody’s rating for the corporate bond remained unchanged.



In December 2000, Standard and Poor’s downgraded Thomas & Betts’ 

corporate credit rating indicating that the company has adequate 

capacity to meet its financial commitments, but that adverse economic 

conditions or changing circumstances are more likely to lead to a 

weakened capacity of the company to meet its financial commitments.



Legal and Regulatory Actions Taken:



Thomas & Betts was subject to shareholder lawsuits and regulatory 

action related to its accounting practices. During 2000 certain 

shareholders of the Corporation filed five separate class-action suits 

in the U.S. District Court for the Western District of Tennessee 

against Thomas & Betts, Clyde R. Moore, former CEO, and Fred R. Jones, 

former CFO. The complaints allege fraud and violations of Section 10(b) 

and 20(a) of the Securities Exchange Act of 1934 (Exchange Act) and SEC 

Rule 10b-5. The plaintiffs allege that purchasers of Thomas & Betts 

common stock between April 28, 1999, and August 21, 2000, were damaged 

when the market value of the stock dropped by nearly 29 percent on 

December 15, 1999; dropped nearly 26 percent on June 20, 2000; and fell 

another 8 percent on August 22, 2000. An unspecified amount of damages 

is sought.



On December 12, 2000, all five of the actions were consolidated into a 

single action. The consolidated complaint essentially repeats the 

allegations in the earlier complaints. On April 9, 2002, the U.S. 

District Court for the Western District of Tennessee entered an order 

granting in part and denying in part the company’s Motion to Dismiss in 

the shareholder class-action lawsuit. The court dismissed allegations 

against Mr. Moore, former CEO, and Mr. Jones, former CFO, for 

violations of Section 10(b) and Rule 10b-5 under the Exchange Act. The 

court also granted KPMG LLP’s Motion to Dismiss in a parallel 

shareholder class-action lawsuit.



On July 24, 2002, the court refrained from establishing a schedule for 

pretrial discovery in this case. The Court instead ordered that the 

parties enter into formal mediation proceedings immediately. A formal 

order controlling the mediation is expected in the near future.



Soon after issuing the August 21, 2000, press release announcing 

substantial charges ($223.9 million) in the second fiscal quarter of 

2000, Thomas & Betts received an informal request for information 

regarding the basis of the charges from SEC. According to the company’s 

fiscal year 2000 annual report, on January 4, 2001, SEC initiated a 

formal order of investigation concerning the company’s financial 

reporting and other matters. To date, no additional action has been 

taken.



[End of section]



Appendix XIX: Waste Management, Inc.:



Business Overview:



Waste Management, Inc., was created in 1998 when USA Waste Services, 

Inc. of Houston acquired the Chicago based Waste Management, Inc., and 

then adopted the name Waste Management.[Footnote 120] Waste Management 

provides integrated waste management services, consisting of 

collection, transfer, disposal, recycling, and resource recovery 

services. In addition, it provides hazardous waste services to 

commercial, industrial, municipal and residential customers. Waste 

Management serves about 27 million municipal, business, and residential 

customers in the United States, Canada, and Puerto Rico. It has a 

network of 600 landfills and transfer stations, 1,400 collection 

centers, as well as disposal and recycling services. To focus on its 

core North American operations, Waste Management has sold off its 

international solid-and hazardous-waste management businesses. For the 

fiscal year ended December 31, 2001, sales were $11.32 billion. Net 

income before extraordinary items and accounting changes totaled $503 

million.



Restatement Data:



In early September 1997, prior to being acquired by USA Waste Services, 

Waste Management, Inc., initiated a broad-ranging analysis of its North 

American operating assets and investments, and it stated that it might 

record a charge that could be material to its results for the year. On 

October 30, 1997, Ronald T. LeMay, chief executive officer (CEO), who 

had been hired in mid-1997, resigned. On November 4, 1997, Waste 

Management announced that it had established an executive search 

committee to identify a new CEO and also indicated that the previously 

announced review would reflect a more conservative management 

philosophy. Then, on November 14, 1997, the company announced that, as 

a result of the ongoing study of the company’s business operations, it 

recorded a $173.3 million, or $0.24 per share, charge in the third 

quarter of 1997, cutting earnings per share to $0.14 from a previously 

reported $0.38. The charge reflected write-downs of assets, increased 

reserves for litigation and insurance and environmental costs. The 

charges also included reclassifying income and expense accounts between 

continuing and discontinuing operations. In addition, the company 

reclassified or adjusted certain items in its financial statements for 

1996 and the first 9 months of 1997, although these reclassifications 

and adjustments had no impact on 1996 earnings and an insignificant 

impact on 1997 earnings, according to the company. On January 5, 1998, 

the company announced that, in response to a request from the 

Securities and Exchange Commission’s (SEC or Commission) Division of 

Corporation Finance, it had agreed to file amended reports in Forms 10-

K and 10-Q for the year ended December 31, 1996, and for the

3-month periods ended March 31, 1997, and June 30, 1997. The amended 

reports were to contain restated financial statements and revised 

management discussion and analysis reflecting information contained in 

its Form 10-Q for the 3 months ended September 30, 1997. The company 

also stated that the ongoing review would likely necessitate revisions 

to previous classifications of various items of income and expense 

reported in its 1994 and 1995 financial statements. Ultimately, the 

company announced a financial statement restatement on January 29, 

1998, and filed an amended Form 10-K on February 24, 1998, with SEC. 

Earnings were restated for the period from 1992 to 1997, totaling $1.3 

billion (table 23). The incorrectly reported numbers were primarily 

expense related. Depreciation expense was misstated due to incorrect 

vehicle, equipment, and container salvage value assumptions and 

capitalized interest relating to landfill construction projects was 

misstated.



On August 3, 1999, after the acquisition of Chicago-based Waste 

Management by USA Waste Services, the new company, Waste Management, 

which was under new senior management, announced that an internal audit 

might cause it to revise first quarter 1999 results. It singled out $95 

million reported as operating income that instead should potentially 

have been calculated as nonrecurring items. On August 16, 1999, the 

company filed its Form 10-Q including the results of its review, 

determining that it had incorrectly reported $30.2 million as first 

quarter pretax income, which instead should have been reflected over 

the life of certain landfill assets. Including charges, earnings for 

the 3 months ended March 31 were revised to $346.7 million, compared 

with $364.3 million as previously reported (table 23).



Table 23: Selected Financial Data, 1992-1999:



[See PDF for image]



[End of table]



Accounting/Audit Firm:



Arthur Andersen LLP (Arthur Andersen) was the company’s independent 

auditor and wrote unqualified opinions for the company during the 

periods that were eventually restated, although Arthur Andersen had 

identified the company’s improper accounting practices and quantified 

those practices in relation to the company’s financial statements. 

According to the complaint filed by SEC, these misstatements were 

presented annually to the company’s management, along with “Proposed 

Adjusting Journal Entries” to correct the errors.



Stock Price:



Waste Management trades on the New York Stock Exchange (NYSE) under the 

ticker symbol WMI.[Footnote 121] Prior to the merger, there appeared to 

be little immediate impact from the initial restatement announcement by 

the company in November 1997 or the subsequent clarifications made in 

January and February 1998, with the stock price hovering around $25 per 

share (fig. 27). The stock price dropped 9 percent with the warning on 

October 10, 1997, that third-quarter earnings would fall below 

estimates; the announcement on October 30, 1997, of the sudden 

resignation of Mr. LeMay after less than 4 months as CEO had a much 

greater impact as the stock price declined 20 percent. The company’s 

stock price rebounded in early March 1998, after it agreed to merge 

with its smaller rival, USA Waste Services Inc.



Figure 27: Daily Stock Prices for Waste Management, May 1, 1997-May 29, 

1998:



[See PDF for image]



Source: GAO’s analysis of NYSE Trade and Quote data.



[End of figure]



As with the restatement announced in 1997, the restatement announced in 

1999 had relatively little immediate impact on the stock price, as the 

market had already received bad news from the company related to 

earnings for the second quarter of 1999 (fig. 28). The restatement 

announcement on August 3, 1999, was made simultaneously with the 

release of scheduled quarterly financial results that met repeatedly 

lowered expectations. Previously, an earnings warning issued after the 

close of trading on July 6, 1999, sent the stock price down 37 percent 

the following day and a second earnings warning on July 29, 1999, drove 

the stock price down another 17 percent. Over the next few months 

following the restatement announcement, the stock price drifted lower 

and then stabilized in the mid-teens.



Figure 28: Daily Stock Prices for Waste Management, February 1, 1999-

February 29, 2000:



[See PDF for image]



Source: GAO’s analysis of NYSE Trade and Quote data.



[End of figure]



Securities Analysts’ Recommendations:



Based on the historical information we were able to obtain, at the time 

of the initial earnings warning on July 6, 1999, analysts generally had 

buy recommendations and price targets of $70 to $75 per share to be 

achieved within 12 months. As late as May 12, 1999, analysts stressed 

Waste Management’s strong cash flow potential. Within weeks of the 

earnings warning, the stock was downgraded primarily to neutral and 

hold ratings, and the few remaining buy recommendations were now 

quoting 12-month price targets of $40 per share.



Credit Rating Agency Actions:



Moody’s Investors Service, Inc. (Moody’s) rated Waste Management’s 

debt. In December 1997 after the first restatement announcement, 

Moody’s confirmed Waste Management’s rating as medium-grade. In 1998 

after the second restatement announcement, Moody’s confirmed Waste 

Management’s credit rating and assigned similar ratings to its other 

debt throughout the year. In April 1999, Moody’s raised the company’s 

long-term debt rating slightly. After the profit warning of July 6, 

1999, Moody’s confirmed the rating but changed the rating outlook to 

negative. On July 29, 1999, Moody’s downgraded the company’s long-and 

short-term debt to its 1997 levels and left it under review for a 

possible downgrade.



Legal and Regulatory Actions:



SEC has instituted and settled anti-fraud injunctions and improper 

professional conduct administrative proceedings [Rule 102(e)] against 

Arthur Andersen and four of its partners. Without admitting or denying 

the allegations or findings, the firm agreed to pay a $7 million civil 

penalty and $120,000 for three of the partners named, at that time the 

largest penalty in an SEC enforcement action against a major accounting 

firm.



Waste Management agreed to settle a shareholder lawsuit alleging years 

of questionable accounting practices. On September 7, 2001, it 

announced a settlement agreement with certain shareholders relating to 

activity that resulted in the 1998 restatement of the financials, and 

other issues. This settlement is final and resulted in establishment of 

a settlement fund for the class of $457 million. Also, SEC recently 

(March 26, 2002) filed suit against the former management (chairman, 

CEO, chief operating officer, chief financial officer (CFO), 

controller, chief accounting officer (CAO), and other senior managers), 

and charged that the defendants engaged in a systematic scheme to 

falsify and misrepresent Waste Management’s financial results between 

1992 and 1997 (list of accused below). The case is still pending.



SEC accused Arthur Andersen of “knowingly or recklessly” issuing false 

and misleading audit reports for Waste Management for the years 1992 

though 1996 that inflated the company’s earnings by more than $1 

billion. In each of the years 1992 through 1996, the Arthur Andersen 

engagement team identified a variety of improper accounting practices 

that caused Waste Management’s operating and income tax expenses to be 

understated and its net income to be overstated. While Arthur Andersen 

quantified some of these misstatements, other known and likely 

misstatements were not quantified and estimated, as required by 

generally accepted auditing standards. In connection with the audit of 

the company’s 1993 financial statements, Arthur Andersen proposed a 

series of “Action Steps” to change Waste Management’s improper 

accounting practices only in future periods and to write off its prior 

misstatements over a 5-to 7-year period, rather than require immediate 

correction in accordance with generally accepted accounting principles. 

Ultimately, when the misstatements were revealed, the company announced 

the largest restatement, at the time, in American corporate history. In 

issuing an unqualified audit report on the restated financial 

statements, Andersen acknowledged that the financial statements it had 

originally audited were materially misstated.



Following is a breakdown of SEC sanctions against Arthur Andersen and 

its staff:



* Arthur Andersen consented (1) to the entry of a permanent injunction 

enjoining it from violating Section 10(b) of the Securities Exchange 

Act of 1934 (Exchange Act) and Rule l0b-5 thereunder; (2) to pay a 

civil money penalty in the amount of $7 million; and (3) in related 

administrative proceedings, to a censure pursuant to Rule 102(e) of 

SEC’s rules of practice, based upon the Commission’s finding that the 

firm had engaged in improper professional conduct and based also upon 

the issuance of the permanent injunction;



* Robert E. Allgyer, now retired and then the partner responsible for 

the Waste Management engagement, consented (1) to the entry of a 

permanent injunction enjoining him from violating Section 10(b) of the 

Exchange Act and Rule l0b-5 thereunder and Section 17(a) of the 

Securities Act of 1933 (Securities Act); (2) to pay a civil money 

penalty in the amount $50,000; and (3) in related administrative 

proceedings pursuant to Rule 102(e), to the entry of an order denying 

him the privilege of appearing or practicing before SEC as an 

accountant, with the right to request his reinstatement after 5 years;



* Edward G. Maier, currently a partner and then the risk management 

partner for Arthur Andersen’s Chicago office and the concurring partner 

on the Waste Management engagement, consented (1) to the entry of a 

permanent injunction enjoining him from violating Section 10(b) of the 

Exchange Act and rule 10b-5 thereunder and Section 17(a) of the 

Securities Act; (2) to pay a civil money penalty in the amount $40,000; 

and (3) in related administrative proceedings pursuant to Rule 102(e), 

to the entry of an order denying him the privilege of appearing or 

practicing before SEC as an accountant, with the right to request his 

reinstatement after 3 years;



* Walter Cercavschi, currently a partner and then a partner on the 

Waste Management engagement, consented (1) to the entry of a permanent 

injunction enjoining him from violating Section 10(b) of the Exchange 

Act and rule 10b-5 thereunder and Section 17(a) of the Securities Act; 

(2) to pay a civil money penalty in the amount $30,000; and (3) in 

related administrative proceedings pursuant to Rule 102(e), to the 

entry of an order denying him the privilege of appearing or practicing 

before SEC as an accountant, with the right to request his 

reinstatement after 3 years;



* Robert G. Kutsenda, currently a partner and then the Central Region 

Audit Practice Director responsible for Arthur Andersen’s Chicago, 

Kansas City, Indianapolis, and Omaha offices (Practice Director), 

consented in administrative proceedings pursuant to Rule 102(e), to the 

entry of an order, based on SEC’s finding that he engaged in improper 

professional conduct, denying him the privilege of appearing or 

practicing before the Commission as an accountant, with the right to 

request reinstatement after 1 year.



On March 26, 2002, SEC filed suit against Waste Management’s former 

management (chairman; CEO; chief operating officer; CFO; controller; 

CAO; and other senior managers) and charged that the defendants engaged 

in a systematic scheme to falsify and misrepresent Waste Management’s 

financial results between 1992 and 1997. SEC’s complaint charges that 

the defendants’ improper accounting practices were centralized at 

corporate headquarters. According to the complaint, each year, Dean L. 

Buntrock, then CEO, Phillip B. Rooney, then the chief operating officer 

and others prepared an annual budget in which they set earnings targets 

for the upcoming year. During the year, they monitored the company’s 

actual operating results and compared them to the quarterly targets set 

in the budget, according to the complaint. To reduce expenses and 

inflate earnings artificially, defendants then primarily used “top-

level adjustments” to conform Waste Management’s actual results to the 

predetermined earnings targets, according to the complaint. The 

inflated earnings of prior periods then became the basis for future 

manipulations. The complaint charges that, to sustain the scheme, 

earnings fraudulently achieved in one period had to be replaced in the 

next.



The complaint alleges that defendants fraudulently manipulated Waste 

Management’s financial results to meet predetermined earnings targets. 

According to the complaint, the company’s revenues were not growing 

fast enough to meet these targets, so defendants instead resorted to 

improperly eliminating and deferring current period expenses to inflate 

earnings. They employed a multitude of improper accounting practices to 

achieve this objective. Among other things, the complaint charges that 

the defendants avoided depreciation expenses on their garbage trucks by 

both assigning unsupported, inflated and arbitrary salvage values and 

extending the useful lives of garbage trucks. They failed to record 

expenses for decreases in the value of landfills as they were filled 

with waste, and refused to record expenses necessary to write off the 

costs of unsuccessful and abandoned landfill development projects. They 

established inflated environmental reserves (liabilities) in 

connection with acquisitions so that the excess reserves could be used 

to avoid recording unrelated operating expenses. Finally, the complaint 

alleges, they improperly capitalized a variety of expenses, and failed 

to establish sufficient reserves (liabilities) to pay for income taxes 

and other expenses.



The following former Waste Management executives, none of whom is 

currently with the company, are named in the SEC legal action:[Footnote 

122]



* Mr. Buntrock, Waste Management’s founder, chairman of the board of 

directors, and CEO during most of the relevant period, was accused of 

being the driving force behind the fraud. According to SEC, he set 

earnings targets, fostered a culture of fraudulent accounting, 

personally directed certain of the accounting changes to make the 

targeted earnings, and was the spokesperson who announced Waste 

Management’s phony numbers. SEC charged that he allegedly was the 

primary beneficiary of the fraud and reaped more than $16.9 million 

from, among other things, performance-based bonuses, retirement 

benefits, charitable giving, and selling Waste Management stock while 

the fraud was ongoing.



* Mr. Rooney, Waste Management’s president and chief operating officer, 

director, and CEO for a portion of the relevant period, was in charge 

of building the profitability of the company’s core solid waste 

operations and at all times exercised overall control over the 

company’s largest subsidiary. According to SEC ensured that required 

write-offs were not recorded and, in some instances, overruled 

accounting decisions that would have a negative impact on operations. 

SEC charged that he allegedly reaped more than $9.2 million from, among 

others things, performance-based bonuses, retirement benefits, and 

selling company stock while the fraud was ongoing.



* James E. Koenig, Waste Management’s executive vice president and CFO, 

was primarily responsible for executing the scheme. SEC alleges that he 

also ordered the destruction of damaging evidence, misled the company’s 

audit committee and internal accountants, and withheld information from 

the outside auditors. SEC charged that he profited by more than 

$900,000 from his fraudulent acts.



* Thomas C. Hau, Waste Management’s vice president, corporate 

controller, and CAO, allegedly was the principal technician for the 

fraudulent accounting. According to charges, among other things, he 

devised many “one-off” accounting manipulations to deliver the targeted 

earnings and carefully crafted the deceptive disclosures according to 

the SEC complaint. He profited by more than $600,000 from his 

fraudulent acts.



* Bruce D. Tobecksen, Waste Management’s vice president of finance, was 

another accounting expert who allegedly was Koenig’s right-hand man. In 

1994, he was enlisted to assist Hau. He allegedly profited by more than 

$400,000 from his fraudulent acts.



* Herbert Getz, Waste Management’s senior vice president, general 

counsel, and secretary, allegedly blessed the company’s fraudulent 

disclosures and allegedly profited by more than $450,000 from his 

fraudulent acts.



SEC alleges that Messrs. Buntrock, Rooney, and Getz violated, or aided 

and abetted violations of, Section 17(a) of the Securities Act, 

Sections 10(b) and 13(a) of the Exchange Act, and Exchange Act Rules 

l0b-5, 12b-20, 13a-1, and 13a-13. SEC further alleges that Messrs. 

Koenig and Hau violated, or aided and abetted violations of, Section 

17(a) of the Securities Act, Sections 10(b), 13(a), 13(b)(2)(A) of the 

Exchange Act, and Exchange Act Rules 10b-5, 12b-20, 13a-1, 13a-13, 

13b2-1, and 13b2-2. The Commission alleges that Mr. Tobecksen violated, 

or aided and abetted violations of, Section 17(a) of the Securities 

Act, Sections 10(b), 13(a), 13(b)(2)(A) of the Exchange Act, and 

Exchange Act Rules l0b-5, 12b-20, 13a-1, 13a-13, and 13b2-1.



The Commission has requested (1) permanent injunctions against Messrs. 

Buntrock, Rooney, Koenig, Hau, Getz, and Tobecksen from future 

violations of, and aiding and abetting future violations of, Section 

17(a) of the Securities Act, Section 10(b) of the Exchange Act and 

Exchange Act Rule 10b-5 and from aiding and abetting future violations 

of Section 13(a) of the Exchange Act, and Exchange Act Rules 12b-20, 

13a-1, and 13a-13; (2) permanent injunctions against Messrs. Koenig, 

Hau, and Tobecksen from aiding and abetting future violations of 

Section 13(b)(2)(A) of the Exchange Act and from future violations of 

Exchange Act Rule 13b2-1; (3) permanent injunction against Messrs. 

Koenig and Hau from future violations of Exchange Act Rule 13b2-2; (4) 

Messrs. Buntrock, Rooney, Koenig, Hau, Getz, and Tobecksen to provide a 

complete accounting of, and to disgorge, the unjust enrichment realized 

by them, plus prejudgment interest thereon; (5) that Messrs. Buntrock, 

Rooney, Koenig, Hau, Getz, and Tobecksen pay civil money penalties 

pursuant to Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)] 

and Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)]; (6) 

Messrs. Buntrock and Rooney pay civil money penalties pursuant to the 

Section 21A of the Exchange Act [15 U.S.C. § 78u-1], in the amount of 

three times their illegal trading profits gained or losses avoided, as 

described herein; and (7) pursuant to Section 20(c) of the Securities 

Act [15 U.S.C. § 77t(c)] and Section 21(d)(2) [15 U.S.C. § 78u(d)(2)] 

of the Exchange Act prohibit Messrs. Buntrock, Rooney, Koenig, Hau, 

Getz, and Tobecksen from serving as an officer or director of a public 

company.



[End of section]



Appendix XX: Xerox Corporation:



Business Overview:



Xerox Corporation (Xerox) provides hardware, software, services, and 

business solutions products. The company’s equipment products include 

multifunctional systems which print, copy, fax and scan as well as 

printers and copiers for office and production markets. Xerox also 

provides document outsourcing, network management, and consulting 

services. For 2001, the company had revenues of $17 billion, a net loss 

of $71 million, and had about 79,000 employees worldwide.



Restatement Data:



On June 16, 2000, Xerox publicly disclosed unexpected provisions in its 

Mexican business. On June 22, 2000, SEC began an investigation into 

accounting issues related to Xerox’s operations in Mexico. On April 3, 

2001, Xerox announced that it was delaying the filing of its year 2000 

Form 10-K with the Securities and Exchange Commission (SEC or 

Commission) due to an independent review begun by Xerox’s audit 

committee in cooperation with Xerox’s independent auditor, KPMG LLP. On 

May 31, 2001, Xerox filed its 2000 Form 10-K with restated consolidated 

financial statements for the years ending December 31, 1998, and 1999, 

as a result of two separate investigations conducted by the audit 

committee of the board of directors. Earnings were restated to reduce 

1998 net income by $122 million (30.9 percent) and 1999 net income by 

$85 million (6 percent). For the 2-year period, Xerox overstated net 

income by $207 million (11.4 percent).



The two independent investigations focused on the company’s operations 

in Mexico and the company’s accounting policies and procedures. As a 

result, the company determined that certain accounting errors and 

irregularities had occurred and certain accounting practices misapplied 

generally accepted accounting principles (GAAP). Xerox found that over 

a period of years, several senior managers in Mexico had collaborated 

to circumvent certain of Xerox’s accounting policies and administrative 

procedures. The charge-offs related to provisions for uncollectible 

long-term receivables, the recording of liabilities for amounts due to 

concessionaires and, to a lesser extent, for contracts that did not 

fully meet the requirements to be recorded as sales-type leases. Other 

items in the restatement were unrelated to Mexico, such as an 

acquisition reserve.



On April 1, 2002, Xerox announced a settlement in principle with SEC 

that called for a second restatement of its financial results for 1997 

through 2000 as well as an adjustment of previously announced 2001 

results (table 24). On June 28, 2002, Xerox restated its consolidated 

financial statements for the years ending December 31, 1997, 1998, 

1999, and 2000, and revised its previously announced 2001 results. For 

1997, net income decreased by $466 million (34.3 percent), 1998 net 

income decreased by $440 million (161.2 percent), 1999 net income 

decreased by $495 million (37 percent), and 2000 net loss increased by 

$16 million (6.2 percent). For the 4-year period, Xerox overstated net 

income by $1.42 billion (52.3 percent). Once again, Xerox determined 

that certain of its accounting practices misapplied GAAP. The 

restatements primarily reflected expense recognition and adjustments in 

the timing and allocation of revenue from bundled leases, which needed 

to be reallocated among equipment, service, supplies and finance 

revenue streams as appropriate by applying a methodology different than 

the one Xerox had used during previous years.



Table 24: Selected Financial Data, 1997-2000:



Dollars in millions.



Revenue, as reported; Fiscal years: 1997: $18,225; Fiscal years: 1998: 

$19,593; Fiscal years: 1999: $19,567; Fiscal years: 2000: $18,701.



Revenue, as restated; Fiscal years: 1997: 17,457; Fiscal years: 1998: 

18,777; Fiscal years: 1999: 18,995; Fiscal years: 2000: 18,751.



Net income (loss), as reported; Fiscal years: 1997: 1,359; Fiscal

years: 1998: 273; Fiscal years: 1999: 1,339; Fiscal years: 2000: (257).



Net income (loss), as restated; Fiscal years: 1997: 893; Fiscal 

years: 1998: (167); Fiscal years: 1999: 844; Fiscal years: 2000: (273).



Source: SEC filings.



[End of table]



Accounting/Audit Firm:



KPMG LLP was the independent auditor until October 4, 2001, when Xerox 

hired PricewaterhouseCoopers LLP (PwC) as its independent accountant. 

Prior to October, KPMG LLP and Xerox had a long relationship. 

Currently, KPMG LLP and at least two of its partners on the Xerox 

account are subjects of an SEC investigation looking into their roles 

in the financial restatement process. KPMG LLP also faces shareholder 

lawsuits over its role in approving the accounting that Xerox and its 

new accountant, PwC, rejected on June 28, 2002.



Stock Price:



Xerox stock is listed on the New York Stock Exchange (NYSE) and trades 

under the ticker symbol XRX. Despite its April 3, 2001, announcement, 

shares of Xerox stock price began a sharp ascent from early April 

through May 2001. In mid-April the company announced fiscal first 

quarter results that beat analyst estimates and further stated that its 

turnaround and restructuring strategy was effective. During this 

period, the stock price climbed from under $5 to over $11 (fig. 29). On 

May 31, 2001, Xerox announced a restatement but also stated that no 

fraud had been discovered and the company’s liquidity would not be 

impacted. Shares rose nearly 10 percent to $9.91. By early September 

2001, shares were trading around $9 per share.



At the beginning of March 2002, Xerox stock was trading near $10 per 

share. When Xerox announced a second restatement on April 1, 2002, the 

stock price peaked at $11.08, up 3 percent on the day. Xerox stock 

price subsequently declined, along with the overall market, through 

June 2002, closing at $6 on June 28, 2002.



Figure 29: Daily Stock Prices for Xerox, November 1, 2000-June 28, 

2002:



[See PDF for image]



Source: GAO’s analysis of NYSE Trade and Quote data.



[End of figure]



Securities Analysts’ Recommendations:



Based on historical analyst research information we identified, we 

found 8 out of 11 securities analysts researching Xerox issued “strong 

buy” recommendations. Buy recommendations continued throughout most of 

1999. However, on October 9, 1999, Xerox warned that its earnings would 

be lower than expected. The same day, the stock price dropped 24 

percent and several analysts downgraded their earnings estimates for 

1999 and 2000.



On December 14, 1999, Xerox warned that fourth quarter earnings would 

fall short of expectations. Although the stock price dropped another 14 

percent and many more analysts downgraded their recommendations, not 

all analysts lowered their recommendations. For example, one analyst 

reiterated her buy recommendation and predicted that the share price 

would hit $41 within the next 18 months. Xerox stock closed the day at 

$20.06 per share.



As the stock price continued to fall, closing at $8.94 on October 24, 

2000, and almost half that at $4.69 on December 5, 2000, 10 of the 11 

analysts who followed Xerox had “hold” ratings on the stock. On June 

28, 2002, at the time of the second restatement and with the stock 

price at $6.97, there was still only one “sell” recommendation on Xerox 

stock.



Credit Rating Agency Actions:



Moody’s Investors Service, Inc. (Moody’s) and Standard and Poor’s rate 

Xerox’s debt. After confirming the credit ratings of certain of Xerox’s 

debt in September 1999, Moody’s placed Xerox under review for possible 

downgrade in December following its October 1999 early warning. In 

April 2000, Moody’s lowered Xerox’s rating and considered its outlook 

stable. However, in July 2000, Xerox was placed under review for 

another possible downgrade. Likewise, Standard and Poor’s credit watch 

was negative. In September 2000, Moody’s and Standard and Poor’s 

lowered their rating for Xerox. In the following month, Moody’s 

announced that Xerox’s ratings had been placed under review for a 

possible downgrade while Standard and Poor’s lowered Xerox’s long-term 

debt rating. In December 2000, Moody’s lowered the company’s debt 

rating and considered its outlook negative. In March 2001, Moody’s 

confirmed Xerox’s rating. In October 2001, Standard and Poor’s lowered 

its long-term rating once again. By January 2002, Moody’s placed 

Xerox’s rating under review for a possible downgrade while Standard and 

Poor’s lowered the rating in April, several weeks after the second 

restatement announcement. Moody’s lowered its rating of Xerox in May 

2002. In June 2002, Standard and Poor’s lowered Xerox’s long-term 

rating once again.



Legal and Regulatory Actions Taken:



A consolidated securities law action (consisting of 17 cases) is 

pending in the U.S. District Court for the District of Connecticut. 

Defendants are the company, Barry Romeril, Paul Allaire and G. Richard 

Thoman. The consolidated action is a class action on behalf purchasers 

of Xerox common stock during the period between October 22, 1998, 

through October 7, 1999. The complaint in the action alleges that in 

violation of Section 10(b) and/or 20(a) of the Securities Exchange Act 

of 1934 (Exchange Act) and Rule 10b-5 thereunder, each of the 

defendants fraudulently disseminated materially false and misleading 

statements and/or concealed material facts. The parties are engaged in 

discovery.



A second consolidated securities law action Carlson vs. Xerox 

Coporation et al. (consisting of 21 cases), is pending in the U.S. 

District Court for the District of Connecticut against the company, 

KPMG LLP, and Paul A. Allaire, G. Richard Thoman, Anne M. Mulcahy, 

Barry D. Romeril, Gregory Tayler and Philip Fishbach. The consolidated 

action purports to be a class action on behalf of the named plaintiffs 

and all purchasers of securities of, and bonds issued by, Xerox during 

the period between February 17, 1998, through February 6, 2001. Among 

other things, the second consolidated amended complaint, filed on 

February 11, 2002, generally alleges that each of the defendants 

violated Section 10(b) of the Exchange Act and Rule

10b-5 thereunder. The individual defendants are also allegedly liable 

as “controlling persons” of the company pursuant to Section 20(a) of 

the Exchange Act. Plaintiffs claim that the defendants fraudulently 

disseminated materially false and misleading statements and/or 

concealed material adverse facts relating to the company’s Mexican 

operations and other matters relating to the company’s accounting 

practices and financial condition. On May 6, 2002, Xerox and the 

individual defendants filed a motion to dismiss the second consolidated 

amended complaint. KPMG LLP filed a separate motion to dismiss. 

According to Xerox, the plaintiffs have indicated that they intend to 

file a third amended complaint.



On January 4, 2002, the Florida State Board of Administration, the 

Teachers’ Retirement System of Louisiana, and Franklin Mutual Advisers 

filed an action in the U. S. District Court for the Northern District 

of Florida against the company, Paul Allaire, G. Richard Thoman, Barry 

Romeril, Anne Mulcahy, Philip Fishbach, Gregory Tayler, Eunice M. 

Filter and KPMG LLP. The plaintiffs allege that each of the defendants 

and KPMG LLP violated Sections 10(b) and 18 of the Exchange Act, Rule 

10b-5 thereunder, the Florida Securities Investors Protection Act, Fl. 

Stat. § 517.301, and the Louisiana Securities Act, R.S. 51:712(A). The 

plaintiffs further claim that the individual defendants are each liable 

as “controlling persons” of the company pursuant to Section 20 of the 

Exchange Act and that each of the defendants is liable for common law 

fraud and negligent misrepresentation. The complaint generally alleges 

that the defendants deceived the investing public by disseminating 

materially false and misleading statements and/or concealing material 

adverse facts relating to the company’s Mexican operations and other 

matters relating to the company’s financial condition and accounting 

practices. This case was transferred to the U.S. District Court for the 

District of Connecticut for consolidation or coordination for pretrial 

purposes with the previously described 21 consolidated actions 

currently pending there under the caption, Carlson v. Xerox et al. 

According to Xerox, the plaintiffs have indicated that they intend to 

file an amended complaint.



On July 1, 2002, a class-action complaint was filed in the U. S. 

District Court for the District of Connecticut alleging violations of 

the Employee Retirement Income Security Act (ERISA). The named 

plaintiff, Thomas Patti, is a Xerox employee who alleges he is a 

participant in the Xerox Corporation Profit Sharing and Savings Plan 

(Plan) who invested or maintained investments in the Xerox stock fund 

during the proposed class period, February 15, 1998 to the present. He 

seeks to represent a class of individuals similarly situated, which he 

claims exceeds 50,000 persons. The defendants include Xerox, the Plan 

(as a nominal defendant only) and the following individuals or groups 

of individuals during the proposed class period: the Plan 

Administrator, the Plan’s administrative committee, the board of 

directors, the finance committee of the board of directors, and the 

treasurer. The complaint claims that all of the defendants were 

fiduciaries of the Plan under ERISA and, as such, were obligated to 

protect the Plan’s assets and act in the best interest of Plan 

participants. The complaint alleges that the defendants failed to do so 

and thereby breached their fiduciary duties. The complaint sets out 

four separate ERISA causes of action. Specifically, he claims that the 

defendants failed to provide accurate and complete material information 

to participants concerning Xerox stock, including accounting practices 

which allegedly artificially inflated the value of the stock, and 

misled participants regarding the soundness of the stock and the 

prudence of investing retirement benefits in Xerox stock. The plaintiff 

also claims that the defendants failed to ensure that Plan assets were 

invested prudently, to monitor the other fiduciaries and to disregard 

Plan directives they knew or should have known were imprudent.



A consolidated putative shareholder derivative action is pending in the 

Supreme Court of the State of New York against several current and 

former members of the board of directors, including William F. Buehler, 

B.R. Inman, Antonia Johnson, Vernon E. Jordan, Jr., Yotaro Kobayashi, 

Hilmar Kopper, Ralph Larsen, George J. Mitchell, N.J. Nicolas, Jr., 

John E. Pepper, Patricia Russo, Martha Seger, Thomas C. Theobald, Paul 

Allaire, G. Richard Thoman, Anne Mulcahy and Barry Romeril, and KPMG 

LLP. The plaintiffs brought this action in the name of and for the 

benefit of the company, which is named as a nominal defendant, and its 

public shareholders.



The complaint alleges that each of the director defendants breached his 

or her fiduciary duties to Xerox and its shareholders by, among other 

things, ignoring indications of a lack of oversight at the company and 

the existence of flawed business and accounting practices within 

Xerox’s Mexican and other operations; failing to have in place 

sufficient controls and procedures to monitor the company’s accounting 

practices; knowingly and recklessly disseminating and permitting to be 

disseminated, misleading information to shareholders and the investing 

public; and permitting Xerox to engage in improper accounting 

practices. The plaintiffs also allege that each of the director 

defendants breached his/her duties of due care and diligence in the 

management and administration of Xerox’s affairs and grossly mismanaged 

or aided and abetted the gross mismanagement of Xerox and its assets. 

The complaint also asserts claims of negligence, negligent 

misrepresentation, breach of contract and breach of fiduciary duty 

against KPMG LLP. Additionally, plaintiffs claim that KPMG LLP is 

liable to Xerox for contribution, based on KPMG LLP’s share of the 

responsibility for any injuries or damages for which Xerox is held 

liable to plaintiffs in related pending securities class-action 

litigation. On behalf of the company, the plaintiffs seek a judgment 

declaring that the director defendants violated and/or aided and 

abetted the breach of their fiduciary duties to Xerox and its 

shareholders.



On May 16, 2002, a shareholder derivative action was brought in U.S. 

District Court for the District of Connecticut against KPMG LLP. The 

company was named as a nominal defendant. The plaintiff purported to 

bring this action derivatively in the right, and for the benefit, of 

Xerox. He contended that he is excused from complying with the 

prerequisite to make a demand on the Xerox board of directors, and that 

such demand would be futile, because the directors are disabled from 

making a disinterested, independent decision about whether to prosecute 

this action. In the original complaint, plaintiff alleged that KPMG 

LLP, Xerox’s former outside auditor, breached its duties of loyalty and 

due care owed to Xerox by repeatedly acquiescing in, permitting and 

aiding and abetting the manipulation of Xerox’s accounting and 

financial records in order to improve the company’s publicly reported 

financial results. He further claimed that KPMG LLP committed 

malpractice and breached its duty to use such skill, prudence and 

diligence as other members of the accounting profession commonly 

possess and exercise. The plaintiff claimed that as a result of KPMG 

LLP’s breaches of duties, Xerox has suffered loss and damage. On May 

29, 2002, the plaintiff amended the complaint to add as defendants the 

present and certain former directors of Xerox. He added claims against 

each of them for breach of fiduciary duty, and separate additional 

claims against the directors who are or were members of the audit 

committee of the board of directors, based upon the alleged failure, 

inter alia, to implement, supervise and maintain proper accounting 

systems, controls and practices.



On June 6, 2002, a shareholder, Stanley Lerner, commenced a derivative 

action in the U. S. District Court for the District of Connecticut 

against Messrs. Allaire, Buehler, Romeril, G. Thoman, and Ms. Mulcahy. 

The plaintiff purports to bring the action derivatively, on behalf of 

Xerox, which is named as a nominal defendant. The plaintiff alleges 

that the individual defendants breached their fiduciary duties of care 

and loyalty by disguising the true operating performance of Xerox 

through improper undisclosed accounting mechanisms between 1997 and 

2000.



On June 22, 2000, SEC began an investigation of accounting issues 

related to Xerox’s Mexican business. On April 11, 2002, SEC and Xerox 

concluded a settlement, as a result of which SEC filed a civil 

complaint alleging that from at least 1997 through 2000, Xerox used a 

variety of undisclosed accounting actions to meet or exceed Wall 

Street’s expectations and disguise its true operating performance from 

investors. The complaint alleges that “in a scheme directed and 

approved by its senior management, Xerox disguised its true operating 

performance by using undisclosed accounting maneuvers--most of which 

were improper--that accelerated the recognition of equipment revenue by 

over $3 billion and increased earnings by approximately $1.5 billion.” 

According to SEC’s complaint, Xerox engaged in a variety of accounting 

violations, including:



* Accelerating leasing revenue--Xerox allegedly repeatedly changed the 

way it accounted for lease revenue but failed to disclose that the 

associated gains were the result of accounting changes rather than 

improved operating performance. Moreover, many of the practices used 

failed to comply with GAAP. For example, Xerox used a return on equity 

allocation method that involved calculating the estimated fair value of 

the equipment as the portion of the lease payments remaining after 

subtracting the estimated fair value of the services and financing 

components. As the estimated fair value of services and financing 

declined, the equipment sales revenue that was recognized immediately 

increased. Xerox was also accused of accelerating the recognition of 

revenues by immediately recognizing as the revenue price increases and 

extensions of existing lease rather than recognizing the increases over 

the remaining life of the lease.



* Improper increases in residual values of leased equipment--Xerox 

allegedly adjusted the estimated residual value of leased equipment 

(that is, its remaining value at the end of the lease term) after the 

inception of the lease in violation of GAAP. SEC alleges that this 

write-up in the residual value of equipment was used to credit the cost 

of sales, were recorded close to the end of quarterly reporting periods 

as “a gap-closing measure to help Xerox meet or exceed internal and 

external earnings and revenue expectations.”:



* Acceleration of revenues from portfolio asset strategy transactions-

-selling investors the revenue streams from portfolios of its leases 

that otherwise would not have allowed for immediate revenue 

recognition. SEC alleges that Xerox used these transactions to 

recognize revenue that would have otherwise been recognized in future 

periods and failed to disclose this practice.



* Fraudulent manipulation of reserves and other income--Xerox allegedly 

increased its earnings by releasing excess reserves that were 

originally established for some other purpose into income in violation 

of GAAP. Xerox also allegedly systematically released a gain associated 

with the successful resolution of a dispute with the Internal Revenue 

Service to improperly increase earnings from 1997 through 2000. 

Although GAAP required that the entire gain be recognized upon the 

completion of all legal contingencies in 1995 and 1996, Xerox used most 

of it to meet its earnings targets.



* Failure to disclose factoring transactions--Xerox allegedly failed to 

disclose factoring transactions that allowed it to report a positive 

year-end cash balance, instead of a negative one. This factoring 

involved Xerox selling its receivables at a discount in order to 

realize instant cash instead of a future stream of cash. According to 

SEC complaint, analysts looked to Xerox to increase its liquidity and 

called for stronger end-of-year cash balances in 1999. Unable to 

generate cash, Xerox management instructed its largest operating units 

to explore the possibility of engaging in factoring transactions with 

local banks. These transactions materially affected Xerox’s 1999 

operating cash flows but these transactions were not disclosed in its 

1999 financial statements. In some of the factoring transactions 

involved buy-back agreements in which Xerox would reacquire the 

receivables after the end of the year. By accounting for these 

transactions as true sales, Xerox violated GAAP. Not only did Xerox 

fail to disclose the agreements, it failed to reverse them in the next 

year.



Without admitting or denying the allegations of the complaint, Xerox 

consented to a final judgment that includes a permanent injunction from 

violating the antifraud, reporting and recordkeeping provisions of the 

federal securities laws, specifically Section 17(a) of the Securities 

Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of 

the Exchange Act and Rules 10b-5, 13a-1. 13a-13, 12b-20 and 13b2-1 

promulgated thereunder. In addition, Xerox agreed to restate its 

financials for the years 1997 through 2000 and pay a $10 million civil 

penalty. As part of this agreement, Xerox also agreed to have its board 

of directors review the company’s material internal accounting controls 

and policies.



[End of section]



Appendix XXI: Listing of Accounting and Auditing Enforcement Releases 

(AAER):



Table 25: Listing of AAER Cases, January 2001-June 2002:



Number 1; Date of release: 1/4/2001; SEC AAER number[A]: 1358; 

Case description: ITMO[B] Transcrypt International, Inc.



Number 2; Date of release: 1/17/2001; SEC AAER number[A]: 1359; 

Case description: ITMO Mark Steven Lynch, CPA.



Number 3; Date of release: 1/19/2001; SEC AAER number[A]: 1360; 

Case description: ITMO KPMG Peat Marwick LLP.



Number 4; Date of release: 1/23/2001; SEC AAER number[A]: 1361; 

Case description: SEC v. Aurora Foods, Inc., et al.



Number 5; Date of release: 1/24/2001; SEC AAER number[A]: 1362; 

Case description: ITMO Linda Mueller.



Number 6; Date of release: 1/25/2001; SEC AAER number[A]: 1363; 

Case description: ITMO Swart, Baumark & Co., LLP and Harry 

J.Swart, CPA.



Number 7; Date of release: 1/31/2001; SEC AAER number[A]: 1364; 

Case description: ITMO Charles P. Morrison, CPA.



Number 8; Date of release: 1/31/2001; SEC AAER number[A]: 1365; 

Case description: SEC v. David W. McConnell and Charles P. 

Morrison.



Number 9; Date of release: 2/5/2001; SEC AAER number[A]: 1366; 

Case description: ITMO SecureSign, Inc.



Number 10; Date of release: 2/5/2001; SEC AAER number[A]: 1367; 

Case description: SEC v. Jeffrey. Fuller, Rebecca L. Schultz, 

and C. Eric Baumann.



Number 11; Date of release: 2/7/2001; SEC AAER number[A]: 1368; 

Case description: ITMO Isaac Hager.



Number 12; Date of release: 2/6/2001; SEC AAER number[A]: 1369; 

Case description: SEC v. Martin R. Frankel, John A. Hackney, 

Robert J. Guyer, Liberty National Securities, Inc., Gary Atnip, and 

Sonia Howe Radencovici.



Number 13; Date of release: 2/14/2001; SEC AAER number[A]: 1370; 

Case description: ITMO Computron Software, Inc., n/k/a/ AXS-

One Inc.



Number 14; Date of release: 2/14/2001; SEC AAER number[A]: 1371; 

Case description: ITMO Michael Ford, CPA.



Number 15; Date of release: 2/28/2001; SEC AAER number[A]: 1372; 

Case description: SEC v. Walter A. Forbes and E. Kirk Shelton.



Number 16; Date of release: 2/28/2001; SEC AAER number[A]: 1373; 

Case description: SEC v. Vigue et al.



Number 17; Date of release: 3/8/2001; SEC AAER number[A]: 1374; 

Case description: ITMO KPMG Peat Marwick LLP.



Number 18; Date of release: 3/2/2001; SEC AAER number[A]: 1375; 

Case description: SEC v. Amazon Natural Treasures, Inc., 

Michael A. Sylver, and Domingos

Loricchio, Jr.



Number 19; Date of release: 3/12/2001; SEC AAER number[A]: 1376; 

Case description: ITMO Kevin E. Orton, CPA.



Number 20; Date of release: 3/14/2001; SEC AAER number[A]: 1377; 

Case description: ITMO Kevin E. Orton, CPA, and Orton & 

Company.



Number 21; Date of release: 3/29/2001; SEC AAER number[A]: 1378; 

Case description: ITMO National Steel Corporation.



Number 22; Date of release: 3/30/2001; SEC AAER number[A]: 1379; 

Case description: ITMO Carl M. Apel.



Number 23; Date of release: 3/30/2001; SEC AAER number[A]: 1380; 

Case description: SEC v. Montedsion, S.p.A.



Number 24; Date of release: 4/16/2001; SEC AAER number[A]: 1381; 

Case description: SEC v. John N. Brincat and Bradley Vallem.



Number 25; Date of release: 4/17/2001; SEC AAER number[A]: 1382; 

Case description: SEC v. Excal Enterprises, Inc., et al.



Number 26; Date of release: 4/18/2001; SEC AAER number[A]: 1383; 

Case description: ITMO Bruce J. Kingdon, Kenneth Goglia, and 

Harvey Plante.



Number 27; Date of release: 4/18/2001; SEC AAER number[A]: 1384; 

Case description: SEC v. Bruce J. Kingdon, Kenneth Goglia, and 

Harvey Plante.



Number 28; Date of release: 4/26/2001; SEC AAER number[A]: 1385; 

Case description: SEC v. Alexandra Elizabeth Montgomery, 

William Kenneth Nestor, and Harriet Gluck.



Number 29; Date of release: 4/27/2001; SEC AAER number[A]: 1386; 

Case description: ITMO Arden Franklin, CPA.



Number 30; Date of release: 5/1/2001; SEC AAER number[A]: 1387; 

Case description: ITMO Joseph Bevaqua, CPA.



Number 31; Date of release: 5/2/2001; SEC AAER number[A]: 1388; 

Case description: ITMO Pat A. Rossetti, CPA.



Number 32; Date of release: 5/4/2001; SEC AAER number[A]: 1389; 

Case description: ITMO Barry C. Scutillo, CPA, Mark F. Jensen, 

CPA, and R. Gordon Jones, CPA.



Number 33; Date of release: 5/4/2001; SEC AAER number[A]: 1390; 

Case description: ITMO R. Gordon Jones, CPA and Mark F. 

Jensen, CPA.



Number 34; Date of release: 5/7/2001; SEC AAER number[A]: 1391; 

Case description: ITMO Craig R. Clark, CPA.



Number 35; Date of release: 5/7/2001; SEC AAER number[A]: 1392; 

Case description: SEC v. Jerry M. Walker & Craig R. Clark.



Number 36; Date of release: 5/15/2001; SEC AAER number[A]: 1393; 

Case description: ITMO Sunbeam Corporation.



Number 37; Date of release: 5/15/2001; SEC AAER number[A]: 1394; 

Case description: ITMO David C. Fannin.



Number 38; Date of release: 5/15/2001; SEC AAER number[A]: 1395; 

Case description: SEC v. Albert J. Dunlap, Russel A. Kersh, 

Robert J. Gluck, Donald R. Uzzi,

Lee B. Griffith, and Phillip E. Harlow.



Number 39; Date of release: 5/15/2001; SEC AAER number[A]: 1396; 

Case description: SEC v. Allan Boren.



Number 40; Date of release: 5/16/2001; SEC AAER number[A]: 1397; 

Case description: ITMO Microtest, Inc.



Number 41; Date of release: 5/23/2001; SEC AAER number[A]: 1398; 

Case description: SEC v. Walter Konigseder.



Number 42; Date of release: 5/24/2001; SEC AAER number[A]: 1399; 

Case description: ITMO Prime Capital Corporation.



SEC AAER number[A]: Date of release Number: 1400; Date of release 

Number: Case description: Date of release Number: Omitted.



Number 43; Date of release: 6/5/2001; SEC AAER number[A]: 1401; 

Case description: ITMO Am-Pac International, Inc.



Number 44; Date of release: 6/4/2001; SEC AAER number[A]: 1402; 

Case description: ITMO James M. Cassidy and TPG Capital 

Corporation.



Number 45; Date of release: 6/5/2001; SEC AAER number[A]: 1403; 

Case description: SEC v. Am-Pac International, Inc., Thomas L. 

Tedrow, and Jeffrey D. Martin.



Number 46; Date of release: 6/14/2001; SEC AAER number[A]: 1404; 

Case description: ITMO James Thomas McCurdy, CPA.



Number 47; Date of release: 6/19/2001; SEC AAER number[A]: 1405; 

Case description: ITMO Arthur Andersen, LLP.



Number 48; Date of release: 6/19/2001; SEC AAER number[A]: 1406; 

Case description: ITMO Robert E. Allgyer, CPA.



Number 49; Date of release: 6/19/2001; SEC AAER number[A]: 1407; 

Case description: ITMO Edward G. Maier, CPA.



Number 50; Date of release: 6/19/2001; SEC AAER number[A]: 1408; 

Case description: ITMO Walter Cercavschi, CPA.



Number 51; Date of release: 6/19/2001; SEC AAER number[A]: 1409; 

Case description: ITMO Robert G. Kutsenda, CPA.



Number 52; Date of release: 6/19/2001; SEC AAER number[A]: 1410; 

Case description: SEC v. Arthur Andersen, LLP, Robert E. 

Allgyer, Walter Cercavschi, and

Edward G. Maier.



Number 53; Date of release: 6/20/2001; SEC AAER number[A]: 1411; 

Case description: SEC v. Ron Messenger, James T. Rush, Scott 

K. Barton, and Gary Hubschman.



Number 54; Date of release: 6/21/2001; SEC AAER number[A]: 1412; 

Case description: ITMO Michael J. Becker.



Number 55; Date of release: 6/21/2001; SEC AAER number[A]: 1413; 

Case description: ITMO J. Allen Seymour, CPA.



Number 56; Date of release: 6/21/2001; SEC AAER number[A]: 1414; 

Case description: SEC v. Richard P. Smyth, Arnold E. Johns, 

Jr., Michael J. Becker, and Alan T. Davis.



Number 57; Date of release: 6/19/2001; SEC AAER number[A]: 1415; 

Case description: ITMO Albert Glenn Yesner.



Number 58; Date of release: 6/25/2001; SEC AAER number[A]: 1416; 

Case description: ITMO American Classic Voyages Co.



Number 59; Date of release: 7/2/2001; SEC AAER number[A]: 1417; 

Case description: ITMO Scott K. Barton, CPA.



Number 60; Date of release: 7/2/2001; SEC AAER number[A]: 1418; 

Case description: ITMO James T. Rush.



Number 61; Date of release: 7/3/2001; SEC AAER number[A]: 1419; 

Case description: SEC v. Mar-Jeanne Tendler, Arthur Tendler, 

and Billie M. Jolson.



Number 62; Date of release: 7/3/2001; SEC AAER number[A]: 1420; 

Case description: ITMO SecureSign, Inc., (formerly 

Yourbankonline.com), Pakie V. Plastino, and William L. Butcher, CPA.



Number 63; Date of release: 7/3/2001; SEC AAER number[A]: 1421; 

Case description: ITMO SecureSign, Inc., (formerly 

Yourbankonline.com), Pakie V. Plastino, and William L. Butcher, CPA.



Number 64; Date of release: 7/18/2001; SEC AAER number[A]: 1422; 

Case description: ITMO American Bank Note Holographics, Inc.



Number 65; Date of release: 7/18/2001; SEC AAER number[A]: 1423; 

Case description: ITMO John Lerlo.



Number 66; Date of release: 7/18/2001; SEC AAER number[A]: 1424; 

Case description: ITMO Mark Goldberg, CPA.



Number 67; Date of release: 7/18/2001; SEC AAER number[A]: 1425; 

Case description: SEC v. Morris Weissman, Joshua Cantor, John 

Gorman, Patrick Gentile, American Banknote Corporation, American Bank 

Note Holographics, Inc, Richard Macchiarulo, Antonio Accornero and 

Russel McGrane.



Number 68; Date of release: 7/20/2001; SEC AAER number[A]: 1426; 

Case description: ITMO Richard P. Macchiarulo, CPA.



Number 69; Date of release: 7/23/2001; SEC AAER number[A]: 1427; 

Case description: SEC v. Edward J. Kiley and Richard N. 

Orzechowski.



Number 70; Date of release: 7/27/2001; SEC AAER number[A]: 1428; 

Case description: ITMO Jeffrey M. Yonkers, CPA.



Number 71; Date of release: 7/30/2001; SEC AAER number[A]: 1429; 

Case description: ITMO BankAmerica Corporation, n/k/a/ Bank of 

America Corporation.



Number 72; Date of release: 8/1/2001; SEC AAER number[A]: 1430; 

Case description: ITMO MAX Internet Communications, Inc.



Number 73; Date of release: 8/1/2001; SEC AAER number[A]: 1431; 

Case description: SEC v. William F. Buettner, Mark D. Kistein, 

and Amy S. Fraizer.



Number 74; Date of release: 8/1/2001; SEC AAER number[A]: 1432; 

Case description: SEC v. Larry Biggs, Jr., Donald McLellan, 

and Leslie D. Crone.



Number 75; Date of release: 8/13/2001; SEC AAER number[A]: 1433; 

Case description: SEC v. Richard I. Berger & Donna M. 

Richardson.



Number 76; Date of release: 8/16/2001; SEC AAER number[A]: 1434; 

Case description: ITMO Leslie D. Crone, CPA.



Number 77; Date of release: 9/4/2001; SEC AAER number[A]: 1435; 

Case description: ITMO Salvatore T. Marino, CPA.



Number 78; Date of release: 9/5/2001; SEC AAER number[A]: 1436; 

Case description: SEC v. Peter T. Caserta, Salvatore Marino, 

and Dana C. Verrill.



Number 79; Date of release: 9/5/2001; SEC AAER number[A]: 1437; 

Case description: ITMO Indus International, Inc.



Number 80; Date of release: 9/5/2001; SEC AAER number[A]: 1438; 

Case description: ITMO Carl Albano.



Number 81; Date of release: 9/5/2001; SEC AAER number[A]: 1439; 

Case description: SEC v. William Grabske, Robert Pocsik, and 

Ralph Widmaier.



Number 82; Date of release: 9/6/2001; SEC AAER number[A]: 1440; 

Case description: SEC v. M&A West, Scott L. Kelly, Salvatore 

Censoprano, Zahra R. Gilak, Frank Thomas Eck, III, and Stanley R. 

Medley.



Number 83; Date of release: 9/10/2001; SEC AAER number[A]: 1441; 

Case description: ITMO Walter Thompson Reeder.



Number 84; Date of release: 9/10/2001; SEC AAER number[A]: 1442; 

Case description: ITMO George Kelly Moore, CPA.



Number 85; Date of release: 9/10/2001; SEC AAER number[A]: 1443; 

Case description: SEC v.Patrick Swisher and Swisher 

International, Inc.



Number 86; Date of release: 9/12/2001; SEC AAER number[A]: 1444; 

Case description: ITMO Baker Hughes, Incorporated.



Number 87; Date of release: 9/12/2001; SEC AAER number[A]: 1445; 

Case description: SEC v. Eric L. Mattson and James W. Harris.



Number 88; Date of release: 9/12/2001; SEC AAER number[A]: 1446; 

Case description: SEC v. KPMG Siddharta Siddharta & Harsono 

and Sonny Harsono.



Number 89; Date of release: 9/17/2001; SEC AAER number[A]: 1447; 

Case description: ITMO Robert M. Fuller.



Number 90; Date of release: 9/19/1931; SEC AAER number[A]: 1448; 

Case description: SEC v. CEC Industries Corporation, Greald H. 

Levine, and Marie A. Levine.



Number 91; Date of release: 9/19/2001; SEC AAER number[A]: 1449; 

Case description: ITMO Madera International, Inc.



Number 92; Date of release: 9/19/2001; SEC AAER number[A]: 1450; 

Case description: ITMO Regina Fernandez.



Number 93; Date of release: 9/19/2001; SEC AAER number[A]: 1451; 

Case description: ITMO Ralph Sanchez, CPA.



Number 94; Date of release: 9/19/2001; SEC AAER number[A]: 1452; 

Case description: ITMO Harlan & Boettger, LLP, William C. 

Boettger, CPA, and P. Robert Wilkenson, CPA.



Number 95; Date of release: 9/19/2001; SEC AAER number[A]: 1453; 

Case description: SEC v. Madera International, Inc., Ramiro M. 

Fernandez-Moris, Daniel S. Lezak, and Regina Fernandez.



Number 96; Date of release: 9/25/2001; SEC AAER number[A]: 1454; 

Case description: SEC v. Gunther International, Ltd.



Number 97; Date of release: 9/26/2001; SEC AAER number[A]: 1455; 

Case description: SEC v. John Daws, Thomas Butler, and Mark 

Folit.



Number 98; Date of release: 9/27/2001; SEC AAER number[A]: 1456; 

Case description: ITMO Charles K.Springer, CPA, Robert S. 

Haugen, CPA, and Haugen, Springer & Co., PC.



Number 99; Date of release: 9/27/2001; SEC AAER number[A]: 1457; 

Case description: ITMO Joseph H. Kiser.



Number 100; Date of release: 9/27/2001; SEC AAER number[A]: 1458; 

Case description: SEC v. Stephen L. Holden, Scott P. 

Skooglund, Kuldarshan S. Padda, and Stephan C. Beal.



Number 101; Date of release: 9/27/2001; SEC AAER number[A]: 1459; 

Case description: ITMO Paul S. Jurewicz.



Number 102; Date of release: 9/27/2001; SEC AAER number[A]: 1460; 

Case description: SEC v. Vari-L Company, Inc., David G. 

Sherman, Jon L. Clark, and Sarah E. Hume.



Number 103; Date of release: 9/28/2001; SEC AAER number[A]: 1461; 

Case description: SEC v. Matthew R. Welch and James C. Horne.



Number 104; Date of release: 10/2/2001; SEC AAER number[A]: 1462; 

Case description: SEC v. Millionaire.com and Robert White.



Number 105; Date of release: 10/3/2001; SEC AAER number[A]: 1463; 

Case description: ITMO Chiquita Brands International, Inc.



Number 106; Date of release: 10/3/2001; SEC AAER number[A]: 1464; 

Case description: SEC v. Chiquita BrandsInternational, Inc.



Number 107; Date of release: 10/4/2001; SEC AAER number[A]: 1465; 

Case description: SEC v. Roys Poyiadjis, Lycourgos Kyprianou 

and AremisSoft Corp.



Number 108; Date of release: 10/5/2001; SEC AAER number[A]: 1466; 

Case description: SEC v. Richard P.Smyth, Arnold E. Johns, 

Jr., Michael J. Becker, and Alan T. Davis.



Number 109; Date of release: 10/15/2001; SEC AAER number[A]: 1467; 

Case description: SEC v. Jay Lapine, Michael Smeraski, Timothy 

Heyerdahl, Deborah Mattiford, Elaine Decker, and David Held.



Number 110; Date of release: 10/17/2001; SEC AAER number[A]: 1468; 

Case description: SEC v. Millionaire.com and Robert White.



Number 111; Date of release: 10/18/2001; SEC AAER number[A]: 1469; 

Case description: ITMO NexPub, Inc. (formerly known as 

PrintontheNet.com, Inc.).



Number 112; Date of release: 10/23/2001; SEC AAER number[A]: 1470; 

Case description: 21(a) Report.



Number 113; Date of release: 10/23/2001; SEC AAER number[A]: 1471; 

Case description: SEC v. Gisela de Leon-Meredith.



Number 114; Date of release: 10/25/2001; SEC AAER number[A]: 1472; 

Case description: SEC v. Hollywood Trenz, Inc., Edward R. 

Showalter, Tracy A. Braime, and Robert E. Burton, Jr.



Number 115; Date of release: 10/29/2001; SEC AAER number[A]: 1473; 

Case description: SEC v. Roys Poyiadjis, Lycourgos Kyprianou 

and AremisSoft Corp.



Number 116; Date of release: 10/30/2001; SEC AAER number[A]: 1474; 

Case description: SEC v. Richard P.Smyth, Arnold E. Johns, 

Jr., Michael J. Becker and Alan T. Davis.



Number 117; Date of release: 11/29/2001; SEC AAER number[A]: 1475; 

Case description: SEC v. Maurice B. Newman and Richard A. 

Gerhart.



Number 118; Date of release: 12/6/2001; SEC AAER number[A]: 1476; 

Case description: ITMO Pinnacle Holdings, Inc.



Number 119; Date of release: 12/7/2001; SEC AAER number[A]: 1477; 

Case description: SEC v. Digital Lightwave, Inc. and Bryan J. 

Zwan.



Number 120; Date of release: 12/14/2001; SEC AAER number[A]: 1478; 

Case description: ITMO Corrine Davies.



Number 121; Date of release: 12/14/2001; SEC AAER number[A]: 1479; 

Case description: ITMO Timothy Tuttle.



Number 122; Date of release: 12/27/2001; SEC AAER number[A]: 1480; 

Case description: SEC v. Nelson Barber.



Number 123; Date of release: 12/27/2001; SEC AAER number[A]: 1481; 

Case description: ITMO Rachel Eckhaus, CPA.



Number 124; Date of release: 12/27/2001; SEC AAER number[A]: 1482; 

Case description: ITMO Jeffrey Bacsik, CPA.



Number 125; Date of release: 12/27/2001; SEC AAER number[A]: 1483; 

Case description: ITMO Barbara Horvath, CPA.



Number 126; Date of release: 1/2/2002; SEC AAER number[A]: 1484; 

Case description: SEC v. R. Bruce Acacio.



Number 127; Date of release: 1/3/2002; SEC AAER number[A]: 1485; 

Case description: ITMO Financial Asset Management Inc., James 

B. Rader, and Debra L. Kennedy.



Number 128; Date of release: 1/7/2002; SEC AAER number[A]: 1486; 

Case description: ITMO California Software Corporation.



Number 129; Date of release: 1/7/2002; SEC AAER number[A]: 1487; 

Case description: ITMO Carol Conway Dewees.



Number 130; Date of release: 1/7/2002; SEC AAER number[A]: 1488; 

Case description: ITMO James E.Slayton.



Number 131; Date of release: 1/8/2002; SEC AAER number[A]: 1489; 

Case description: SEC v. David C. Guenthner and Jay 

M.Samuelson.



Number 132; Date of release: 1/11/2002; SEC AAER number[A]: 1490; 

Case description: ITMO Michael Marrie, CPA & Brian Berry, CPA.



Number 133; Date of release: 1/14/2002; SEC AAER number[A]: 1491; 

Case description: ITMO KPMG, LLP.



Number 134; Date of release: 1/14/2002; SEC AAER number[A]: 1492; 

Case description: SEC v. R. Bruce Acacio.



Number 135; Date of release: 1/14/2002; SEC AAER number[A]: 1493; 

Case description: SEC v. Michael A. Porter - AA forgery.



Number 136; Date of release: 1/15/2002; SEC AAER number[A]: 1494; 

Case description: ITMO BellSouth Corporation.



Number 137; Date of release: 1/15/2002; SEC AAER number[A]: 1495; 

Case description: SEC v. BellSouth Corporation.



Number 138; Date of release: 1/15/2002; SEC AAER number[A]: 1496; 

Case description: ITMO Nelson Barber, CPA.



Number 139; Date of release: 1/15/2002; SEC AAER number[A]: 1497; 

Case description: SEC v. William P. Trainor, Vincent D. 

Celentano, Medical Diagnostic Products, Inc. (f/k/a Novatek 

International, Inc.), Karen Losordo, Diane M. Trainor, Daniel J. 

Trainor, Geraldine Trainor and Mary N. Celentano.



Number 140; Date of release: 1/15/2002; SEC AAER number[A]: 1498; 

Case description: SEC v. Nelson Barber.



Number 141; Date of release: 1/16/2002; SEC AAER number[A]: 1499; 

Case description: ITMO Trump Hotels & Casino Resorts, Inc.



Number 142; Date of release: 1/16/2002; SEC AAER number[A]: 1500; 

Case description: SEC v. Thomas W. Lambach.



Number 143; Date of release: 1/30/2002; SEC AAER number[A]: 1501; 

Case description: ITMO Cyberguard Corporation, William D. 

Murray, and Tommy D. Steele.



Number 144; Date of release: 1/30/2002; SEC AAER number[A]: 1502; 

Case description: SEC v. Patrick O. Wheeler, Steven S. 

Gallers, and Robert L. Carberry.



Number 145; Date of release: 2/5/2002; SEC AAER number[A]: 1503; 

Case description: ITMO Critical Path, Inc.



Number 146; Date of release: 2/5/2002; SEC AAER number[A]: 1504; 

Case description: SEC v. David A. Thatcher and Timothy J. 

Ganley.



Number 147; Date of release: 2/13/2002; SEC AAER number[A]: 1505; 

Case description: ITMO William H. Warner and Robert J. 

Quigley.



Number 148; Date of release: 2/14/2002; SEC AAER number[A]: 1506; 

Case description: SEC v. International Thoroughbred Breeders, 

Inc., and Nunzio DeSantis.



Number 149; Date of release: 2/20/2002; SEC AAER number[A]: 1507; 

Case description: ITMO JDN Realty Corporation.



Number 150; Date of release: 2/20/2002; SEC AAER number[A]: 1508; 

Case description: SEC v. J. Donald Nichols, Jeb L. Hughes, and 

C. Sheldon Whittelsey IV.



Number 151; Date of release: 3/1/2002; SEC AAER number[A]: 1509; 

Case description: SEC v. Eagle Building Technologies, Inc. and 

Anthony Damato.



Number 152; Date of release: 3/5/2002; SEC AAER number[A]: 1510; 

Case description: ITMO Kevin R. Andersen, CPA.



Number 153; Date of release: 3/5/2002; SEC AAER number[A]: 1511; 

Case description: ITMO Telxon Corporation, Gary, L. Grand,and 

James G. Cleveland.



Number 154; Date of release: 3/5/2002; SEC AAER number[A]: 1512; 

Case description: SEC v. Kenneth W. Haver.



Number 155; Date of release: 3/6/2002; SEC AAER number[A]: 1513; 

Case description: ITMO James E. Slayton, CPA.



Number 156; Date of release: 3/6/2002; SEC AAER number[A]: 1514; 

Case description: SEC v. Raece Richardson, David McKenzie, 

Cameron Gorges, and Freestar Technologies.



Number 157; Date of release: 3/6/2002; SEC AAER number[A]: 1515; 

Case description: SEC v. American Telephone + Data, Inc., 

William Posnett Lynas, III, Janeen Hauxhurst-Lynas, and Daniel W. 

Kratochvil.



Number 158; Date of release: 3/12/2002; SEC AAER number[A]: 1516; 

Case description: SEC v. Paul Skulsky, et al.



Number 159; Date of release: 3/12/2002; SEC AAER number[A]: 1517; 

Case description: ITMO Frederick W. Kolling III, CPA.



Number 160; Date of release: 3/12/2002; SEC AAER number[A]: 1518; 

Case description: ITMO William A. Dickson and Stephen P. 

Collins.



Number 161; Date of release: 3/12/2002; SEC AAER number[A]: 1519; 

Case description: ITMO Donald J. MacPhee.



Number 162; Date of release: 3/12/2002; SEC AAER number[A]: 1520; 

Case description: ITMO IGI, Inc.



Number 163; Date of release: 3/13/2002; SEC AAER number[A]: 1521; 

Case description: SEC v. John P. Gallo.



Number 164; Date of release: 3/18/2002; SEC AAER number[A]: 1522; 

Case description: ITMO Timothy S. Heyerdahl, CPA.



Number 165; Date of release: 3/18/2002; SEC AAER number[A]: 1523; 

Case description: ITMO David Held, CPA.



Number 166; Date of release: 3/18/2002; SEC AAER number[A]: 1524; 

Case description: ITMO Elaine A. Decker, CPA.



Number 167; Date of release: 3/20/2002; SEC AAER number[A]: 1525; 

Case description: ITMO Lisa M. Beuche, CPA.



Number 168; Date of release: 3/21/2002; SEC AAER number[A]: 1526; 

Case description: ITMO Keith Spero.



Number 169; Date of release: 3/21/2002; SEC AAER number[A]: 1527; 

Case description: ITMO Frank Valdez.



Number 170; Date of release: 3/21/2002; SEC AAER number[A]: 1528; 

Case description: ITMO Harlan Schier.



Number 171; Date of release: 3/21/2002; SEC AAER number[A]: 1529; 

Case description: ITMO Daniel Parker.



Number 172; Date of release: 3/21/2002; SEC AAER number[A]: 1530; 

Case description: ITMO Uri Evan, Joseph S. Cohen, and 

Frederick J. Horowitz.



Number 173; Date of release: 3/21/2002; SEC AAER number[A]: 1531; 

Case description: SEC v. Harold J. Macsata.



Number 174; Date of release: 3/26/2002; SEC AAER number[A]: 1532; 

Case description: SEC v. Dean L. Buntrock, Phillip B. Rooney, 

James E. Koenig, Thomas C. Hau, Herbert A. Getz, and Bruce D. 

Tobecksen.



Number 175; Date of release: 3/27/2002; SEC AAER number[A]: 1533; 

Case description: ITMO Kimberly-Clark Corporation and John W. 

Donehower.



Number 176; Date of release: 3/27/2002; SEC AAER number[A]: 1534; 

Case description: ITMO Signal Technology Corporation.



Number 177; Date of release: 3/27/2002; SEC AAER number[A]: 1535; 

Case description: SEC v. Dale Peterson et al.



Number 178; Date of release: 3/28/2002; SEC AAER number[A]: 1536; 

Case description: ITMO PictureTel Corp. and Les B. Strauss.



Number 179; Date of release: 3/28/2002; SEC AAER number[A]: 1537; 

Case description: ITMO David T. Dodge.



Number 180; Date of release: 3/28/2002; SEC AAER number[A]: 1538; 

Case description: SEC v. Leonard J. Guida and Les B. Strauss.



Number 181; Date of release: 4/2/2002; SEC AAER number[A]: 1539; 

Case description: ITMO David A. Thatcher.



Number 182; Date of release: 4/4/2002; SEC AAER number[A]: 1540; 

Case description: SEC v. Miko Leung (a/k/a Leung Ming Kang) 

and Sit Wa Leung.



Number 183; Date of release: 4/3/2002; SEC AAER number[A]: 1541; 

Case description: SEC v. J. Donald Nichols, Jeb L. Hughes, and 

C. Sheldon Whittelsey, IV.



Number 184; Date of release: 4/11/2002; SEC AAER number[A]: 1542; 

Case description: SEC v. Xerox Corporation.



Number 185; Date of release: 4/22/2002; SEC AAER number[A]: 1543; 

Case description: ITMO Teltran International Group, LTD.



Number 186; Date of release: 4/22/2002; SEC AAER number[A]: 1544; 

Case description: SEC v. Byron Robert Lerner.



Number 187; Date of release: 4/22/2002; SEC AAER number[A]: 1545; 

Case description: ITMO Michael R. Drogin, CPA.



Number 188; Date of release: 4/23/2002; SEC AAER number[A]: 1546; 

Case description: SEC v. Patrick Quinlan, Lee Wells, Keith 

Pietila, Alexander Ajemian, John O’Leary, Cheryl Swain and Kevin Lasky.



Number 189; Date of release: 4/24/2002; SEC AAER number[A]: 1547; 

Case description: ITMO Kenneth W. Haver, CPA.



Number 190; Date of release: 4/24/2002; SEC AAER number[A]: 1548; 

Case description: SEC v. Kenneth W. Haver.



Number 191; Date of release: 4/25/2002; SEC AAER number[A]: 1549; 

Case description: SEC v. G. Matthias Heinzelmann, III.



Number 192; Date of release: 4/25/2002; SEC AAER number[A]: 1550; 

Case description: ITMO Surety Capital Corporation.



Number 193; Date of release: 5/1/2002; SEC AAER number[A]: 1551; 

Case description: ITMO Serologicals Corporation, Inc.



Number 194; Date of release: 5/1/2002; SEC AAER number[A]: 1552; 

Case description: ITMO Michael A. Kolberg and Dale E. 

Huizenga.



Number 195; Date of release: 5/6/2002; SEC AAER number[A]: 1553; 

Case description: ITMO Anicom, Inc.



Number 196; Date of release: 5/6/2002; SEC AAER number[A]: 1554; 

Case description: SEC v. Carl E. Putnam, Donald C. Welchko, 

John P. Figurelli, Daryl T. Spinell, Ronald M. Bandyk, and Renee L. 

LeVault.



Number 197; Date of release: 5/14/2002; SEC AAER number[A]: 1555; 

Case description: ITMO Edison Schools, Inc.



Number 198; Date of release: 5/16/2002; SEC AAER number[A]: 1556; 

Case description: ITMO Dennis M. Gaito, CPA.



Number 199; Date of release: 5/20/2002; SEC AAER number[A]: 1557; 

Case description: ITMO Legato Systems, Inc. and Stephen Wise.



Number 200; Date of release: 5/20/2002; SEC AAER number[A]: 1558; 

Case description: ITMO Ernst & Young, LLP.



Number 201; Date of release: 5/20/2002; SEC AAER number[A]: 1559; 

Case description: SEC v. Reza Mikailla, Gary F. Pado and Unify 

Corporation.



Number 202; Date of release: 5/20/2002; SEC AAER number[A]: 1560; 

Case description: SEC v. Alan K. Anderson.



Number 203; Date of release: 5/21/2002; SEC AAER number[A]: 1561; 

Case description: SEC v. David Malmstedt and Mark Huetteman.



Number 204; Date of release: 5/30/2002; SEC AAER number[A]: 1562; 

Case description: SEC v. James Murphy, et al.



Number 205; Date of release: 6/5/2002; SEC AAER number[A]: 1563; 

Case description: ITMO Microsoft Corporation.



Number 206; Date of release: 6/5/2002; SEC AAER number[A]: 1564; 

Case description: ITMO Advanced Technical Products, Inc., 

James S. Carter, and Garrett L. Dominy.



Number 207; Date of release: 6/5/2002; SEC AAER number[A]: 1565; 

Case description: ITMO Katrina Krug, CPA.



Number 208; Date of release: 6/5/2002; SEC AAER number[A]: 1566; 

Case description: ITMO James E. Slayton, CPA.



Number 209; Date of release: 6/5/2002; SEC AAER number[A]: 1567; 

Case description: ITMO James E. Slayton, CPA.



Number 210; Date of release: 6/5/2002; SEC AAER number[A]: 1568; 

Case description: ITMO John K. Bradley.



Number 211; Date of release: 6/5/2002; SEC AAER number[A]: 1569; 

Case description: SEC v. John F. Mortell, Thomas F. Wraback, 

William S. Edwards, Gregory D. Norton, Glenn P. Duffy, Jerry W. Ross 

and Gerald T. Barry.



Number 212; Date of release: 6/6/2002; SEC AAER number[A]: 1570; 

Case description: SEC v. Madera International, Inc., Ramiro M. 

Fernandez-Moris, and Daniel S. Lezak.



Number 213; Date of release: 6/7/2002; SEC AAER number[A]: 1571; 

Case description: ITMO Korea Data Systems USA, Inc., Lap Shun 

(John) Hui, and Bun (Ben) Wong.



Number 214; Date of release: 6/7/2002; SEC AAER number[A]: 1572; 

Case description: ITMO Gerald S. Papazian.



Number 215; Date of release: 6/10/2002; SEC AAER number[A]: 1573; 

Case description: ITMO Ashford.Com, Inc., Kenneth E. Kurtzman, 

Brian E. Bergeron and Amazon.com, Inc.



Number 216; Date of release: 6/10/2002; SEC AAER number[A]: 1574; 

Case description: SEC v. Kenneth E. Kurtzman and Brian E. 

Bergeron.



Number 217; Date of release: 6/11/2002; SEC AAER number[A]: 1575; 

Case description: SEC v. Aura Systems, Inc., et al.



Number 218; Date of release: 6/12/2002; SEC AAER number[A]: 1576; 

Case description: SEC v. Patrick O. Wheeler, Steven S. 

Gallers, and Robert L. Carberry.



Number 219; Date of release: 6/14/2002; SEC AAER number[A]: 1577; 

Case description: SEC v. John Daws, Thomas Butler and Mark 

Folit.



Number 220; Date of release: 6/12/2002; SEC AAER number[A]: 1578; 

Case description: SEC v. Paul Skulsky, et al.



Number 221; Date of release: 6/21/2002; SEC AAER number[A]: 1579; 

Case description: ITMO Rite Aid Corporation.



Number 222; Date of release: 6/21/2002; SEC AAER number[A]: 1580; 

Case description: ITMO Timothy J. Noonan.



Number 223; Date of release: 6/21/2002; SEC AAER number[A]: 1581; 

Case description: SEC v. Frank M. Bergonzi, Martin L. Grass, 

and Franklin C. Brown.



Number 224; Date of release: 6/21/2002; SEC AAER number[A]: 1582; 

Case description: SEC v. Bruce Hill, et al. and Richard P. 

Vatcher.



Number 225; Date of release: 6/25/2002; SEC AAER number[A]: 1583; 

Case description: SEC v. John N. Brincat, Sr. and Bradley 

Vallem.



Number 226; Date of release: 6/27/2002; SEC AAER number[A]: 1584; 

Case description: ITMO Moret Ernst & Young Accountants, n/k/a/ 

Ernst & Young Accountants.



Number 227; Date of release: 6/27/2002; SEC AAER number[A]: 1585; 

Case description: SEC v. WorldCom, Inc.



Number 228; Date of release: 6/28/2002; SEC AAER number[A]: 1586; 

Case description: SEC v. WorldCom, Inc.



[A] AAERs are subsets of SEC’s litigation releases and releases 

concerning administrative proceedings.



[B] ITMO means in the matter of.



Source: SEC (See www.sec.gov/divisions/enforce/friactions. shtml).



[End of section]



Appendix XXII: Frequently Cited Violations:



Table 26: Accounting and Auditing Related Federal Securities Laws or 

Rules Violations:



Federal securities laws or rules violated: Section 17(a) of the 

Securities Act of 1933 (Securities Act); Description: Prohibits fraud 

in the offer or sale of securities.



Federal securities laws or rules violated: Section 13(a) of the 

Securities Exchange Act (Exchange Act) and Rules 13a-1 and 13a-13 

promulgated thereunder; Description: Require issuers of registered 

securities to keep their registration statements accurate and file 

annual and quarterly reports with SEC.



Federal securities laws or rules violated: Section 10(b) and Rule 10b-

5 of the Exchange Act; Description: In connection with the purchase or 

sale of a security, prohibit a person from making an untrue statement 

of a material fact or from omitting a material fact necessary to keep 

statements from being misleading in light of the circumstances under 

which they were made.



Federal securities laws or rules violated: Rule 12b-20 of the Exchange 

Act; Description: Requires that periodic reports contain all 

information necessary to ensure that statements made in such reports 

are not materially misleading.



Federal securities laws or rules violated: Sections 13(b)(2)(A) and 

13(b)(2)(B) of the Exchange Act; Description: 13(b)(2)(A) requires 

issuers of securities registered on an exchange to file reports to make 

and keep books, records, and accounts, which, in reasonable detail, 

accurately and fairly reflect transactions and the disposition of the 

issuer’s assets. 13(b)(2)(B) requires such firms to devise and maintain 

an adequate system of internal accounting controls.



Federal securities laws or rules violated: Section 13(b)(5) of the 

Exchange Act; Description: Prohibits any person from knowingly 

circumventing or failing to implement a system of internal accounting 

controls or falsifying any book, record, or account, which, in 

reasonable detail, accurately and fairly reflects the transactions and 

dispositions of the assets of the issuer.



Federal securities laws or rules violated: Rules 13b2-1 and 13b2-2 of 

the; Exchange Act; Description: 13b2-1 prohibits any person from 

directly or indirectly falsifying a book, record, or account subject to 

Section 13(b)(2)(A). 13b2-2 prohibits any director or officer of an 

issuer from directly or indirectly making a materially false or 

misleading statement or from omitting to state a material fact 

necessary to keep statements made from being misleading, in light of 

the circumstances under which they were made. This rule applies to 

statements made (1) to accountants in connection with required audits 

or examinations of financial statements or (2) in the preparation or 

filing of documents or reports required to be filed with SEC.



Source: GAO staff analysis of SEC AAERs issued from January 2001 

through February 2002.



[End of section]



Appendix XXIII: Side-by-Side of the Existing Corporate Governance and 

Oversight Structure and the Sarbanes-Oxley Act of 2002:



The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) addresses many of the 

concerns about the existing corporate governance and financial 

reporting regulatory structure by enhancing the oversight of financial 

accounting. One of the major cornerstones of the act is the creation of 

a new oversight body, the Public Company Oversight Board (Board), to 

oversee the audit of public companies. The act requires that any public 

accounting firm that performs any audit report for any publicly held 

company register with the Board. To ensure the independence of this new 

board, it will be structured as a nonprofit corporation funded by 

registration and annual fees from registered public accounting firms 

and support fees assessed to issuers. A majority of its members will be 

nonaccountants. Unlike the previous oversight structure [that is, now 

disbanded the Public Oversight Board (POB)], this new board will have 

sweeping powers to inspect accounting firms, set rules and standards 

for auditing, and impose meaningful sanctions on violators. Further, 

the act addresses auditor independence issues by, among other things, 

prohibiting auditors from providing certain nonaudit services to their 

audit clients and strengthening the oversight role of the board of 

directors.



To increase corporate accountability, corporate boards of directors’ 

audit committee members must be “independent” and are responsible for 

selecting and overseeing outside auditors. In addition, pursuant to 

Securities and Exchange Commission (SEC or Commission) rules required 

by the act, top corporate officials will have to personally attest to 

the accuracy of their firm’s accounting (and can face civil and 

criminal penalties if the certifications are false). The act also 

addresses numerous other issues aimed at strengthening investor 

confidence, including requiring that SEC or, at its direction, the 

self-regulatory organizations (SRO), implement rules addressing 

analysts’ conflicts of interest, creating new disclosure requirements 

and criminal prohibitions, increasing criminal sanctions, and requiring 

that SEC issue rules that address standards of professional conduct for 

attorneys. See table 27 for an overview of key provisions of the 

existing structure and the new structure under Sarbanes-Oxley. This 

list is not intended to be an exhaustive overview of either structure.



Table 27: Side-by-Side Comparison of Existing Structure and New 

Sarbanes-Oxley Structure:



Section: Auditing Oversight and Standards.



Section: Federal oversight; Existing (former) structure[A]: Auditing 

Oversight and Standards: The Securities Exchange Act of 1934 (Exchange 

Act) authorizes SEC to establish auditing and accounting standards. SEC 

has promulgated some regulations applicable to audits of public 

companies (SEC Rule S-X, 17 C.F.R. Part 210) but in large part 

delegated its authority to the American Institute of Certified Public 

Accountants (AICPA), which establishes and interprets generally 

accepted auditing standards (GAAS) through its 15 member Auditing 

Standards Board (ASB). ASB sets the ground rules for how an auditor 

determines whether the information reported in a financial statement is 

reasonable and whether it conforms to generally accepted accounting 

principles (GAAP).[B]; Sarbanes-Oxley: Auditing Oversight and 

Standards: Establishes the Board, a private, nonprofit corporation 

funded by registration and annual fees from registered public 

accounting firms (RPAF) and support fees assessed to issuers. The act 

specifies that the Board is not an agency or establishment of the 

federal government. The Board will have five members serving full time; 

two members must be certified public accountants (CPA). Subject to 

special provisions for initial members to establish staggered terms, 

members will serve 5-year terms, with a lifetime limitation of two 

terms.; Public company accounting firms must register with the Board 

in order to audit issuers (public companies). Subject to SEC oversight 

and approval of its rules, the Board has general authority to oversee 

the audit of public companies and protect and further the public 

interest in the preparation of public company audit reports. The Board 

is to establish rules to regulate the auditing process (auditing, 

quality control, ethics, independence, and other standards relating to 

the preparation of audit reports), conduct periodic inspections of 

accounting firms, investigate possible violations of auditing rules, 

enforce compliance with the act and, if applicable, impose sanctions 

(that is, for intentional, knowing, or repeated negligent violations of 

Sarbanes-Oxley, Board rules, securities laws and SEC rules relating to 

audit reports and professional standards.).



Section: Federal statutory and regulatory standards; Existing (former) 

structure[A]: Auditing Oversight and Standards: Audit requirements are 

generally provided under Section 10A of the Exchange Act (15 U.S.C. 

78j-1). Section 10A requires audit procedures designed to; * provide 

reasonable assurance of detecting illegal acts; * to identify related 

party transactions that are material to the financial statements; and; 

* to evaluate whether there is substantial doubt about the continued 

existence as a going concern. Also under Section 10A, the auditor has a 

duty to investigate and take remedial measures concerning possibly 

unlawful acts. SEC’s regulations before enactment of Sarbanes-Oxley 

contained an auditor independence standard and descriptions of several 

circumstances the Commission would consider inconsistent with the 
standard 

in determining whether an auditor was independent. These circumstances 

include the provision of nonaudit services during an audit and 
relationships 

between the auditor and the company. Those and other factors are 
“general 

guidance only,” and their application depends on particular facts and 

circumstances. 17 C.F.R. § 210.2-01 (2002).; Sarbanes-Oxley: 

Auditing Oversight and Standards: Section 10A is amended to, among 

other things; * limit the scope of services provided by auditors 

while performing an audit; * require audit committee approval of 

permitted nonaudit services; * require audit partner rotation every 5 

years; * require reports to audit committees regarding critical 

accounting policies and practices, alternative treatments discussed 

with management, and certain written communications with management; * 

prohibit conflicts of interest on the part of former auditor employees 

who occupy certain executive positions with the public companies; and; 

* require SEC to issue implementing rules by January 6, 2003.; 

In addition, the Board has authority to adopt auditor independence 

standards.



Section: Nongovernment; organizations; Existing (former) structure[A]: 

Auditing Oversight and Standards: AICPA is involved in the development 

and interpretation of auditing standards and accounting-related 

matters. (Until it terminated in May 2002, the Public Oversight Board, 

a body formed by AICPA in consultation with the SEC, oversaw AICPA 

members who audited SEC registrants and contributed to the development 

and application of auditing standards.)[C]; Sarbanes-Oxley: Auditing 

Oversight and Standards: The Board is to cooperate on an ongoing basis 

with certain professional groups of accountants and advisory groups to 

examine the need for changes in auditing, quality control, ethics, and 

other standards and take other steps to increase the effectiveness of 

the standard setting process.



Section: Auditing & quality control standards; Existing (former) 

structure[A]: Auditing Oversight and Standards: ASB, a 15 member senior 

committee of the AICPA, promulgates GAAS, related standards governing 

attestation services, and quality control standards.; Sarbanes-Oxley: 

Auditing Oversight and Standards: The Board has authority to establish 

standards for auditing and quality control; standards are to be set by 

rule and must include requirements set forth in Sarbanes-Oxley. Subject 

to SEC approval, the Board may adopt as rules auditing standards 

proposed by one or more professional groups of accountants or advisory 

groups.



Section: Auditor independence; Existing (former) structure[A]: 

Auditing Oversight and Standards: The AICPA Code of Professional 

Conduct contains auditor independence rules that address many of the 

same matters addressed by SEC auditor independence rules for auditors 

of SEC registrants (SEC regulation S-X). On July 31, 2002, AICPA 

published its “Plain English Guide to Independence” to assist 

accountants in understanding independence requirements.; SROs listing 

rules [New York Stock Exchange (NYSE), National Association of 

Securities Dealers (NASD), American Stock Exchange (Amex)], with 

amendments submitted to SEC in August 2002 for approval, establish 

requirements for corporate audit committee independence from and 

control over auditors and the oversight and approval of nonaudit 

services.; Sarbanes-Oxley: Auditing Oversight and Standards: As 

discussed above, SEC is to promulgate rules implementing Sarbanes-Oxley 

auditor independence standards by January 6, 2003. The Board has 

authority to issue rules establishing auditor independence and any 

other appropriate independence standards.



Section: Ethics; Existing (former) structure[A]: Auditing Oversight and 

Standards: Professional Ethics Executive Committee (PEEC)--AICPA’s 

Ethics Division (16 members from private practice and 5 members from 

academia and the legal profession) is responsible for maintaining, 

interpreting and enforcing the AICPA Code of Professional Conduct and, 

when appropriate, suggesting changes to the Code. The division 

investigates any allegation of wrongdoing by members made by the 

public, federal or state regulatory bodies, other AICPA or other 

appropriate sources. The division also initiates investigations if it 

becomes aware of allegations of wrongdoing through media reports or 

federal or state regulatory action. The division is responsible for 

AICPA’s auditor independence rules.; Sarbanes-Oxley: Auditing 

Oversight and Standards: General rulemaking authority to establish 

ethics requirements.



Section: Oversight of Organizations Responsible for Auditor Regulation 

and Auditing Standards.



Section: Oversight; Existing (former) structure[A]: Auditing Oversight 

and Standards: SEC has no authority over the composition, funding, 

activities, or subsidiaries of the AICPA. SEC has accepted GAAS 

promulgated by the ASB as the standards for audits.; Sarbanes-Oxley: 

Auditing Oversight and Standards: SEC has general oversight authority 

over the Board. SEC responsibilities include:

* planning and approving capability and capacity of the Board; * 

oversight and enforcement authority over the Board; * approval of 

Board rules; * removal of Board member(s) for good cause; and; * 

review of Board inspection findings and challenges to draft findings 

(this authority also is provided to appropriate state regulators).



Section: Communications with audit committee; Existing (former) 

structure[A]: Auditing Oversight and Standards: AICPA audit and attest 

standards require, among other things, communications with audit 

committee about the auditor’s judgments on the quality of the company’s 

accounting principles and communications with management. (See, for 

example, AIPCA Audit and Attest Standards, Statements on Audit 

Standards Nos. 61, 71). SRO corporate governance rules, as proposed to 

SEC in August 2002, contain similar audit committee requirements.; 

Sarbanes-Oxley: Auditing Oversight and Standards: RPAF must report to 

audit committee on critical accounting policies and practices to be 

used, treatments of financial information within GAAP discussed with 

issuer’s management and related matters, and material written 

communications between RPAF and issuer’s management.



Section: Corporate Governance.



Section: Audit committee compliance; Existing (former) structure[A]: 

Auditing Oversight and Standards: SEC Rules require proxy disclosure of 

audit committee members’ independence. SRO rules require audit 

committee charters to cover audit committee financial expertise and 

oversight of independent auditors. NYSE, NASD, Amex have submitted to 

SEC for approval proposed amendments to corporate governance listing 

standards, which include audit committee independence standards and 

audit oversight requirements.; Sarbanes-Oxley: Auditing Oversight and 

Standards: Not later than 270 days after enactment of Sarbanes-Oxley, 

SEC must promulgate rules directing national securities exchanges and 

national securities associations to prohibit the listing of any 

security of any issuer that is not in compliance with Sarbanes-Oxley 

provisions requiring audit committee responsibility for oversight of 

RPFA, audit committee independence, audit committee complaint 

processing procedures, and funding for RPAFs and audit committee 

advisers.



Section: Audit committee responsibilities; Existing (former) 

structure[A]: Auditing Oversight and Standards: Audit committee 

responsibilities, which include audit committee independence standards 

and audit oversight requirements, are contained in SRO listing 

requirements and in fiduciary and other duties based on state laws. 

Guidance on auditor relationship with audit committee is set forth in 

AICPA Statements on Accounting Standards.; Sarbanes-Oxley: Auditing 

Oversight and Standards: The audit committee is responsible for 

appointment, compensation, and oversight of RPAF employed by issuer; 

Each audit committee member must be a member of issuer’s board of 

directors and be otherwise independent; Audit committee must establish 

procedures for receipt, retention, and treatment of complaints received 

by the issuer regarding accounting, internal accounting controls, 

auditing matters and the confidential, anonymous treatment of 

submissions by employees concerning questionable accounting or auditing 

matters.; Auditing and permissible nonaudit services must be 

preapproved by the issuer’s audit committee.



Section: Executive officers & directors,; report certification; 

Existing (former) structure[A]: Auditing Oversight and Standards: There 

are no statutory requirements that the chief executive officer or the 

chief financial officer (CFO) certify certain (CEO) periodic corporate 

financial statements. Under instructions issued by SEC for periodic and 

other filings, there was a general requirement that the forms had to be 

signed by officers, and in the case of annual reports, by a majority of 

the directors as well. These signing requirements did not include any 

type of certification or other attestation regarding the accuracy or 

completeness of the report. On June 14, 2002, SEC published a Notice of 

Proposed Rulemaking, containing a requirement that a company’s CEO and 

CFO certify that the information contained in its financial reports is 

complete and true in all-important respects. On June 27, 2002, SEC 

issued an order requiring the CEOs of 945 companies (each with reported 

annual revenues in excess of $1.2 billion) personally to make a one-

time written certification, under oath, that their company’s most 

recent periodic reports filed with the Commission are complete and 

accurate.; Sarbanes-Oxley: Auditing Oversight and Standards: Principal 

executive officer(s) and principal financial officer(s) must certify 

the following in each annual or quarterly report; * signing officer 

has reviewed the report; * the report fairly presents, in all material 

respects, issuer’s operations and financial condition;  SEC issued 
final rules requiring 

the certification effective August 29, 2002; (See the later 

description in this table of a corresponding criminal provision 

relating to director and officer certifications).



Section: Executive officers & directors, improper influence; Existing 

(former) structure[A]: Auditing Oversight and Standards: Under state 

law fiduciary principles and applicable federal securities laws, 

officers, directors could be liable to the company and/or shareholder 

for causing materially false corporate financial reports.; Sarbanes-

Oxley: Auditing Oversight and Standards: Subject to SEC rules, officers 

and directors, and those acting at their direction, are prohibited from 

fraudulently influencing or misleading any independent public or 

certified accountant conducting audit for the purpose of making 

financial statements materially misleading.



Section: Executive officers & directors, forfeiture for restatement 

resulting from misconduct; Existing (former) structure[A]: Auditing 

Oversight and Standards: Sarbanes-Oxley: Auditing Oversight 

and Standards: Issuer CEOs and CFOs must reimburse issuer for bonuses, 

incentive-based or equity-based compensation, and profits from sales of 

issuer securities received during 1-year period following an accounting 

restatement due to material noncompliance with financial reporting 

requirements resulting from misconduct.



Section: Executive officers & directors, pension fund blackout; 

Existing (former) structure[A]: Auditing Oversight and Standards: 

Sarbanes-Oxley: Auditing Oversight and Standards: Directors 

and executive officers of issuers are prohibited from selling, 

purchasing, or transferring stock during pension fund blackout periods 

(that is, when at least 50 percent of beneficiaries are prohibited from 

trading); blackout period requires 30-day prior notice; profits from 

such insider trades are to be recovered by issuer.



Section: Executive officers & directors, personal loans prohibited; 

Existing (former) structure[A]: Auditing Oversight and Standards: In 

most states, a corporation may lend money to an officer or director if 

the board of directors authorizes the loan and finds that it will 

“benefit” the corporation.; Sarbanes-Oxley: Auditing Oversight and 

Standards: Issuers are prohibited from making personal loans (with some 

exceptions) to or for any director or executive officer.



Section: Corporate Disclosure.



Section: Disclosure of approval of non-audit services; Existing 

(former) structure[A]: Auditing Oversight and Standards: SEC 

regulations require disclosure in proxy statements of fees paid for 

services rendered by the company’s principal accountant. 17 C.F.R. § 

14a-101, Instruction Item 9 (2002).; Sarbanes-Oxley: Auditing Oversight 

and Standards: Issuer must disclose in periodic reports the audit 

committee’s approval of a nonaudit service to be performed by the 

issuer’s auditor.



Section: Director, officer and principal stockholder disclosure 

regarding holdings of issuer securities; Existing (former) 

structure[A]: Auditing Oversight and Standards: Section 16(a) of the 

1934 Act requires certain insiders (directors, officers, beneficial 

owners of more than 10 percent equity) to file a Section 16(a) 

transaction report (reporting any change in the person’s ownership of, 

or any purchase or sale of, a security-based swap agreement involving 

the company’s equity security). Previously, this reporting was required 

within 10 days after the close of the calendar month in which the 

transaction occurred.; Sarbanes-Oxley: Auditing Oversight and 

Standards: Section 403 of the act amends section 16(a) of the Exchange 

Act to shorten the due date for Section 16 insiders (directors, 

officers, and beneficial equity owners of more than 10 percent of a 

company’s equity) to file Section 16(a) transaction report. These 

transaction reports must be filed within 2 business days after the 

transaction has been executed. SEC may, by rule, provide for later than 

2-day reporting should the agency determine cases in which the 2-day 

period is not feasible. Beginning not later than one year after the 

enactment of the act, these ownership and trading reports will be 

required to be filed electronically and made rapidly available on the 

internet. On August 28, 2002, SEC adopted final implementing rules, 

which became effective August 29, 2002.[D].



Section: Off-balance-sheet transactions; Existing (former) 

structure[A]: Auditing Oversight and Standards: In its “Commission 

Statement About Management’s Discussion and Analysis of Financial 

Condition and Results of Operations,” SEC. Rel. Nos. 33-8056; 34-45321 

(Jan. 23, 2002), SEC discussed circumstances under which the 

“Management’s Discussion and Analysis” portion of a financial statement 

(MD&A) required by Regulation S-K, 17 C.F.R. § 229.303, should include 

a discussion of the company’s off-balance-sheet transactions and 

relationships. The rule did not specifically require such a 

discussion.; For SPE partnerships, consolidation was not required if, 

among other things, an independent third party invested at least 3 

percent of the capital. The Financial Accounting Standards Board is 

proposing to raise this threshold and change other conditions for 

avoiding consolidation on the sponsor’s balance sheet.; Sarbanes-Oxley: 

Auditing Oversight and Standards: Subject to mandated SEC rules, 

issuers must disclose material off-balance-sheet transactions and 

relationships that may have a material effect on the issuer’s financial 

condition and present pro forma financial information in a manner that 

is not misleading and, under GAAP, is reconcilable with the issuer’s 

financial condition.



Section: Internal control report; Existing (former) structure[A]: 

Auditing Oversight and Standards: Sarbanes-Oxley: Auditing 

Oversight and Standards: Subject to mandated SEC rules, annual reports 

must contain an “internal control report” describing management 

responsibility for, and effectiveness of, internal controls for 

financial reporting; RPAF that prepares or issues the issuer’s audit 

report must attest to and report on management’s assessment.



Section: Financial officer code of ethics; Existing (former) 

structure[A]: Auditing Oversight and Standards: Sarbanes-

Oxley: Auditing Oversight and Standards: SEC rules for periodic reports 

must require an issuer to disclose whether it has adopted a code of 

ethics for senior financial officers or explain why a code has not been 

adopted, and rules for updated disclosure (Form 8-K) must require 

issuer immediately to disclose any change in or waiver of the code of 

ethics for senior financial officers.



Section: Audit committee financial expertise; Existing (former) 

structure[A]: Auditing Oversight and Standards: Prior to Sarbanes-

Oxley, SRO rules required all audit committee members to satisfy 

financial literacy requirements and to have at least one member with 

financial management expertise.; Sarbanes-Oxley: Auditing Oversight 

and Standards: Subject to SEC rules, the issuer must disclose, together 

with periodic reports, whether its members include at least one 

financial expert or explain why at least one member of the committee is 

not a financial expert, as that term is defined by SEC.



Section: Material changes of financial condition or operations; 

Existing (former) structure[A]: Auditing Oversight and Standards: SEC 

Form 8-K must be filed with SEC within certain time periods after the 

occurrence of an event listed on the form. These events relate to the 

company’s financial condition or operations. The periods range from 5 

business days to 15 calendar days. SEC has issued proposed rules 

setting forth additional events to be reported. SEC Rel. Nos. 33-8106; 

34-46084 (June 17, 2002). The Commission proposed to accelerate the 

Form 8-K filing deadline by requiring companies to file the form within 

2 business days after the occurrence of a triggering event.; Sarbanes-

Oxley: Auditing Oversight and Standards: In connection with 

registration statements and periodic reports, a public company must 

publicly disclose “on a rapid and current basis” such information 

concerning material changes in the issuer’s financial condition or 

operations, as is to be required by SEC rule.



Section: Fraud Accountability (Title VIII of Sarbanes-Oxley).



Section: Destruction, alteration, falsification of records in federal 

investigations and bankruptcy; Existing (former) structure[A]: 

Auditing Oversight and Standards: Prior to the Sarbanes-Oxley, anyone 

who “corruptly persuades” others to destroy, alter or conceal evidence 

can be prosecuted under 18 U.S.C. § 1512. Section 1512 reaches 

destruction of evidence with intent to obstruct an official proceeding 

that may not yet have been commenced. However, Section 1512 does not 

reach the “individual shredder.” While prosecution of obstruction under 

18 U.S.C. § 1505 does not require “corrupt persuasion,” it does require 

the existence of a pending proceeding. In addition, existing law does 

not explicitly address the retention of accounting work papers for a 

fixed period of time.; Sarbanes-Oxley: Auditing Oversight and 

Standards: Prohibits knowingly destroying, altering, concealing or 

falsifying records with the intent to obstruct or influence an 

investigation in a matter within the jurisdiction of any U.S. 

department or agency or any bankruptcy case; imposes penalty of a fine 

or not more than 20 years in prison or both. Section 802 adds two new 

criminal provisions, 18 U.S.C. §§ 1519 and 1520. Section 1519 expands 

existing law to cover the alteration, destruction or falsification of 

records, documents or tangible objects, by any person, with intent to 

impede, obstruct or influence, the investigation or proper 

administration of any “matters” within the jurisdiction of any 

department or agency of the United States, or any bankruptcy 

proceeding, or in relation to or contemplation of any such matter or 

proceeding. This section explicitly reaches activities by an individual 

“in relation to or contemplation of” any matters. No corrupt persuasion 

is required. New Section 1519 should be read in conjunction with the 

amendment to 18 U.S.C. 1512, added by Section 1102 of Sarbanes-Oxley, 

discussed below, which similarly bars corrupt acts to destroy, alter, 

mutilate or conceal evidence, in contemplation of an “official 

proceeding.”.



Section: Destruction of corporate audit records; Existing (former) 

structure[A]: Auditing Oversight and Standards: Prior to enactment of 

Sarbanes-Oxley, there was no general legal duty that an accountant 

maintain client files for a particular time interval. Accountants are 

subject to various documents retention requirements depending upon the 

subject matter. For example, some federal regulations contain document 

retention requirements, and some state insurance laws require the 

retention of insurance company audit documents for specific time 

periods. See Office of the Federal Register, Guide to Record Retention 

Requirements in the Code of Federal Regulations, published with annual 

supplements; see also, Skupsky, ed., Legal Requirements for Business 

Records: Federal and State, a four-volume loose leaf; and Hancock, ed., 

Guide to Records Retention (1986). Some states--Colorado, 

Georgia, Illinois, Maryland, New Hampshire, North Dakota, Oklahoma and 

Texas--have adopted the Uniform Preservation of Private Business 

Records Act or its equivalent, which contains a 3 year retention 

requirement that may be applicable to audit records. See http://

www.accountantslaw.com/documentretentionpolicies.htm; Sarbanes-Oxley: 

Auditing Oversight and Standards: Mandates that any accountant who 

conducts an audit of a public corporation shall maintain all work 

papers for 5 years and instructs SEC to promulgate rules regarding 

record retention; knowing and willful violation of the 5 year retention 

requirement and/or SEC retention rules is punishable by a fine or 10 

years in prison or both.; Accountants who fail to retain the audit or 

review workpapers of a covered audit for a period of 5 years will 

violate Section 1520, which creates a new felony, with a maximum period 

of incarceration of 10 years. Under rulemaking authority granted in 

Section 1520(b), SEC will promulgate rules relating to the retention of 

workpapers and other audit or review documents.



Section: Nondischarge provision; Existing (former) structure[A]: 

Auditing Oversight and Standards: Section 523 of the federal bankruptcy 

code, 11 U.S.C § 523, contains a list of exceptions to provisions of 

the code permitting the discharge of debts.; Sarbanes-Oxley: Auditing 

Oversight and Standards: The act amends federal bankruptcy law so that 

a debtor cannot discharge in bankruptcy any order or settlement arising 

from a claim that the debtor has violated any Federal or state 

securities law or regulation, or from a claim of common law fraud, 

deceit, or manipulation in connection with the purchase or sale of any 

security. Debts for penalties, fines, damages, disgorgement payments 

and other costs and payments, likewise, may not be discharged in 

bankruptcy.



Section: Statute of limitations for private right of action based on 

contravention of securities regulations; Existing (former) 

structure[A]: Auditing Oversight and Standards: Previous law allowed 

for a suit to be brought within 1 year after discovery of violation or 

3 years after occurrence of violation.; Sarbanes-Oxley: Auditing 

Oversight and Standards: Section 804 establishes a statute of 

limitations for claims of fraud, deceit, manipulation, or contrivance 

in contravention of a regulatory requirement concerning federal 

securities laws as follows; * 2 years after discovery of facts 

constituting the violation; * 5 years after such violation.



Section: Sentencing commission review; Existing (former) structure[A]: 

Auditing Oversight and Standards: Under previous law, questions arose 

about whether the Sentencing Guidelines sufficiently address 

obstruction of justice crimes.; Sarbanes-Oxley: Auditing Oversight and 

Standards: Section 805 requires the U.S. Sentencing Commission to 

undertake an expedited review of these issues, particularly in light of 

the two new obstruction of justice statutes, described above. It also 

directs the Sentencing Commission to consider a number of factors such 

as destruction of a large amount of evidence, participation of a large 

number of individuals, or destruction of particularly probative or 

essential evidence, which might be considered sufficiently aggravating 

as to warrant additional enhancements or inclusion as offense 

characteristics.



Section: Whistle-blower protection; Existing (former) structure[A]: 

Auditing Oversight and Standards: Sarbanes-Oxley: Auditing 

Oversight and Standards: Section 806 prohibits public companies, their 

officers, employees, contractors and agents from retaliatory actions 

against employees who assist in proceedings involving alleged 

securities violations and provides an administrative process for 

employees seeking relief for violators. Also, the section provides for 

a civil action based on a violation of the section.



Section: Criminal penalties for securities fraud; Existing (former) 

structure[A]: Auditing Oversight and Standards: The previous federal 

criminal laws (Title 18 of the U.S. Code) did not have a specific crime 

directly prohibiting securities fraud schemes. Prosecutors have found 

it necessary to reach many securities fraud schemes through the mail 

and wire fraud statutes. Securities fraud has also been prosecuted as a 

violation of provisions of the federal securities laws.; Sarbanes-

Oxley: Auditing Oversight and Standards: Section 807 of Sarbanes-Oxley 

creates a specific felony for securities fraud punishable by fine or up 

to 25 years incarceration. This provision complements existing 

securities law. The statute requires a nexus to certain types of 

securities, but no proof of the use of the mails or wires is required.



Section: Evidence tampering & impeding official proceedings; Existing 

(former) structure[A]: Auditing Oversight and Standards: Title 18 

U.S.C. § 1512, in part, provides a 10 year maximum term of 

incarceration for an offender who corruptly persuades another person 

with the intent to, in part, destroy or alter evidence.; Sarbanes-

Oxley: Auditing Oversight and Standards: Section 1102 of Sarbanes-Oxley 

imposes a fine and/or a term of imprisonment of up to 20 years on any 

person who corruptly alters, destroys, mutilates or conceals a record, 

document, or other object with the intent to impair the object’s 

integrity or availability for use in an official proceeding, or who 

corruptly otherwise obstructs, influences or impedes an official 

proceeding. (The Attorney General advises that Section 1512, as 

amended, should be read in conjunction with the new Section 1519, added 

by section 802 of this act, which criminalizes certain acts intended to 

impede, obstruct, or influence “any matter” within the jurisdiction of 

any department or agency of the United States, or in relation to or 

contemplation of any such matter. The term “corruptly” shall be 

construed as requiring proof of a criminal state of mind on the part of 

the defendant. See Field Guidance on New Criminal Authorities Enacted 

in the Sarbanes-Oxley Act of 2002 (H.R. 3763) Concerning Corporate 

Fraud and accountability http://www.usdoj.gov/ag/readingroom/

sarox1.htm).



Section: Freeze on extraordinary payments; Existing (former) 

structure[A]: Auditing Oversight and Standards: Sarbanes-

Oxley: Auditing Oversight and Standards: Section 1103 of Sarbanes-Oxley 

authorizes SEC to petition courts for a temporary escrow of 

extraordinary payments that might by made to any director, officer, 

employee, partner, controlling person or agent during the course of an 

investigation involving potential violations of the federal securities 

laws.



Section: Sentencing guidelines; Existing (former) structure[A]: 

Auditing Oversight and Standards: Questions have arisen whether the 

current Sentencing Guidelines sufficiently address securities, 

accounting, and pension fraud, and related offenses.; Sarbanes-Oxley: 

Auditing Oversight and Standards: Section 1104 of Sarbanes-Oxley 

requests the Sentencing Commission to study existing guidelines and 

consider expedited issuance of amended guidelines, within 180 days 

after enactment of Sarbanes-Oxley, which address securities, 

accounting, and pension fraud, and related offenses.



Section: Officer & director prohibition; Existing (former) 

structure[A]: Auditing Oversight and Standards: Under current law, a 

court may bar an officer or director from serving as an officer or 

director of a public company if SEC proves that the conduct of that 

person demonstrates “substantial unfitness” to serve in that capacity.; 

Sarbanes-Oxley: Auditing Oversight and Standards: Section 1105 

authorizes SEC, in administrative Cease and Desist (C&D) proceedings, 

to prohibit any person who has violated the antifraud provisions of the 

Exchange Act or the Securities Act of 1933, or SEC’s rules under those 

provisions, from acting as an officer or director of any public company 

if the conduct demonstrates unfitness to serves as an officer or 

director.; Sarbanes-Oxley eliminates the word “substantial,” thereby 

permitting a bar based on the person’s unfitness. In addition, the act 

empowers SEC to prohibit any person who violates Federal securities 

laws, rules, or regulations from acting as an officer or director of 

any public company if the person is unfit to serve in such a capacity.



Section: Increased criminal penalties for Exchange Act violations; 

Existing (former) structure[A]: Auditing Oversight and Standards: 

Section 32(a) of the Exchange Act, 15 U.S.C. § 78ff, provides for a 

criminal fine of $1 million for individuals and/or imprisonment of up 

to 10 years, or a fine of $2.5 million for anyone other than an 

individual.; Sarbanes-Oxley: Auditing Oversight and Standards: Section 

1106 increases penalties under the Exchange Act to $5 million or 

imprisonment of not more than 20 years and increases the fine to $25 

million for persons other than a natural person.



Section: Penalties for retaliation; Existing (former) structure[A]: 

Auditing Oversight and Standards: There is no explicit protection from 

retaliation for an individual who provides truthful information to a 

law enforcement officer concerning the commission or possible 

commission of a federal offense.; Sarbanes-Oxley: Auditing Oversight 

and Standards: Section 1107 provides for a new subsection (e) of 18 

U.S.C. § 1513, which creates a felony offense for any person knowingly 

to take any action, with intent to retaliate, harmful to a person who 

provides such information concerning a federal offense. An offense is 

subject to a fine or imprisonment of not more than 10 years or both.



Section: White-Collar Crime.



Section: Increased criminal penalties; Existing (former) structure[A]: 

Auditing Oversight and Standards: Under previous law (Chapter 63 of 

U.S. Code Title 18--Mail Fraud) conspiracies to violate the mail fraud 

statute (§ 1341), the wire fraud statute (§ 1343), the bank fraud 

statute (§ 1344) and the health care fraud statute (§ 1347) are 

punishable by a maximum 5 year sentence. The wire fraud offense did not 

explicitly reach “attempts” to commit the substantive offense. However, 

this was not an impediment in practice, because proof of a scheme to 

defraud did not necessarily require proof that the scheme was 

successful.; Under previous law, the maximum term of imprisonment for 

violations of the mail and wire fraud statutes (18 U.S.C. §§ 1341, 

1343) is 5 years, with the exception of fraud affecting a financial 

institution, which has a maximum term of incarceration of up to 30 

years.; Under the previous provision of ERISA, 29 U.S.C. § 1131, any 

person who willfully violates the reporting and disclosure requirements 

concerning employee benefit plans as set forth in 29 U.S.C. §§ 1021-

1031, or any regulation or order issued thereunder, is punishable by a 

fine, and/or a term of imprisonment not to exceed 1 year.; Sarbanes-

Oxley: Auditing Oversight and Standards: Section 902 of Sarbanes-Oxely 

amends 18 U.S.C. § 1349 to provide that attempts and conspiracies to 

commit the substantive federal fraud offenses described in the adjacent 

column, as well as the new securities fraud offense, will have the same 

maximum punishment as the substantive crime. This section also 

effectively adds an “attempt” to commit the wire fraud offense (18 

U.S.C. § 1343) as a federal crime. The remainder of the fraud statutes 

already includes “attempts.”; ; ; Section 903 of Sarbanes-Oxley 

amends 18 U.S.C. §§ 1341 and 1343 by increasing the maximum 5-year 

penalty for mail or wire fraud to 20 years. The maximum term of 

incarceration for fraud affecting a financial institution remains at a 

maximum of 30 years.; ; Section 904 of Sarbanes-Oxley increases the 

fines in 29 U.S.C. § 1131 to $100,000 (for an individual person), 

$500,000 (for persons other than an individual). Section 1131 also 

increases the maximum term of imprisonment from 1 year (a misdemeanor) 

to a maximum term of imprisonment of 10 years. The increase in the fine 

for individuals will have no limiting effect insofar as individuals 

convicted of violating Section 1131 will now be subject to the 

alternative fine provisions of 18 U.S.C. § 3571 for felony convictions. 

In the absence of restrictive language in Section 904 of the Act, 

individuals will be subject to the maximum fine of $250,000, or fine 

based on the defendant’s gain or the victims’ loss, under § 3571. While 

the amendment also increases the fine in § 1131 to $500,000 for persons 

other than an individual, this change has merely increased the fine to 

the level of the maximum fine for an organization already set forth in 

§ 3571.



Section: Sentencing commission; Existing (former) structure[A]: 

Auditing Oversight and Standards: Under previous law, questions have 

arisen whether the Sentencing Guidelines sufficiently address white-

collar offenses.; Sarbanes-Oxley: Auditing Oversight and Standards: 

Section 905 of Sarbanes-Oxley reaches beyond Section 803 of the act, 

described above, which addresses sentencing guidelines solely for 

obstruction of justice. Section 905 requires that the Sentencing 

Commission study the existing guidelines and consider expedited 

issuance of amended guidelines within 180 days after enactment of this 

Act, which would address all the new criminal provisions and increased 

criminal penalties in Sarbanes-Oxley. This section also requires the 

Sentencing Commission to consider the broader issues of whether the 

white-collar crime guidelines provide for sufficient deterrence and 

punishment, and assure reasonable consistency with other relevant 

directives and guidelines.



Section: Certification of financial reports and criminal penalties for 

knowingly false certification; Existing (former) structure[A]: 

Auditing Oversight and Standards: As discussed previously, there are no 

statutory requirements that the chief executive officer or the chief 

financial officer certify certain periodic corporate financial 

statements.; Sarbanes-Oxley: Auditing Oversight and Standards: Section 

906 of Sarbanes-Oxely enacts new 18 U.S.C. § 1350, which requires that 

the chief executive officer and the chief financial officer (or the 

equivalent thereof) of a public company provide a statement certifying 

that the periodic reports containing financial statements filed with 

SEC fully comply with the requirements of Sections 13(a) and 15(d) of 

the Exchange Act, and that the information contained in the periodic 

reports fairly presents, in all material respects, the financial 

condition and results of operations of the issuer. Certifying a report 

while knowing that it does not comport with all of the requirements of 

§ 1350 is punishable by a fine of not more than $1 million and 

imprisonment of up to 10 years. A willful violation is punishable by a 

fine of not more than $5 million and imprisonment of up to 20 years.



Section: Analyst Conflict of Interest.



Section: Analyst independence rules; Existing (former) structure[A]: 

Auditing Oversight and Standards: NASD Rule 2711 and NYSE Rule 472 

establish standards for communications with the public to address 

research analyst conflicts of interest. (See pp. 65 to 66).; Sarbanes-

Oxley: Auditing Oversight and Standards: Requires SEC or, as directed 

by SEC, a registered SRO, to adopt rules to address conflicts of 

interest that can arise when securities analysts recommend equity 

securities in research reports and public appearances, including 

rules; * restricting the prepublication clearance or approval of 

research reports by persons either engaged in investment banking 

activities or not directly responsible for investment research; * 

limiting the supervision and compensatory evaluation of securities 

analysts to officials who are not engaged in investment banking 

activities; * prohibiting a broker or dealer involved with investment 

banking activities from retaliating against a securities analyst as a 

result of an unfavorable research report; * establishing periods 

during which brokers or dealers who served as underwriters or dealers 

in a public offering should not publish or otherwise distribute 

research reports relating to the pertinent securities or their issuer; 

* establishing safeguards to ensure that securities analysts are 

separated within the investment firm from the review, pressure, or 

oversight of those whose involvement in investment banking might 

potentially bias the analyst’s judgment or supervision (§ 501(a)).; 

SEC has issued for comment proposed regulation AC, which would require 

research analysts to certify that the views expressed by the analyst in 

a research report or public appearance accurately reflect the analyst’s 

personal views and whether the analyst received compensation in 

connection with his or her specific views and recommendations. SEC Rel. 

Nos. 33-8119; 34-46301 (Aug. 2, 2002).



Section: Conflict of interest disclosure rules; Existing (former) 

structure[A]: Auditing Oversight and Standards: See independence rule. 

Voluntary disclosure by firms. SEC’s August 2, 2002, proposed 

regulation would require that any research report accurately reflect 

the analyst’s personal views, and whether the analyst received 

compensation or other payments in connection with his or her specific 

recommendations or views.; Sarbanes-Oxley: Auditing Oversight and 

Standards: Requires SEC or, as directed by SEC, a registered SRO to 

adopt rules requiring securities analysts (in public appearances) and 

broker/dealers in research reports) to disclose specified conflicts of 

interest that are known or should have been known at the time of the 

appearance or the date of distribution of the report.



Section: Other SEC-Related Provisions.



Section: Professional conduct standards; Existing (former) 

structure[A]: Auditing Oversight and Standards: No explicit rules of 

conduct for attorneys.; Sarbanes-Oxley: Auditing Oversight and 

Standards: SEC must issue rules establishing minimum standards of 

professional conduct for attorneys appearing and practicing before SEC 

that require, among other things; * Reporting issuer’s CEO or 

general counsel evidence of material violation of securities law, 

breach of fiduciary duty or similar violation by issuer or issuer’s 

agent; * Report the evidence to issuer’s audit committee or another 

committee outside directors or the entire board if general counsel or 

officer fail to respond appropriately (§ 307).



Section: SEC resources & authority; Existing (former) structure[A]: 

Auditing Oversight and Standards: SEC’s 2002 budget appropriation was 

$437.9 million and the 2003 President’s budget request included a 

budget estimate of $466.9 million for SEC. In addition to various other 

authorities, SEC has authority to establish auditing and accounting 

standards; Sarbanes-Oxley: Auditing Oversight and Standards: Section 

601 authorizes fiscal year 2003 budget of $776 million to carry out 

activities described in the section.



Section: Censure & denial of appearance before SEC; Existing (former) 

structure[A]: Auditing Oversight and Standards: SEC, under its Rule of 

Practice 102(e), could censure or deny appearance before SEC by any 

person, including a licensed professional who lacks character or 

integrity, engaged in unethical or improper professional conduct, or 

willfully violated or willfully aided and abetted the violation of the 

federal securities laws or the rules and regulations issued 

thereunder.; Sarbanes-Oxley: Auditing Oversight and Standards: 

Codifies SEC authority to censure any person or deny any person the 

privilege to practice before the Commission if SEC appropriately 

determines that the person lacks requisite qualifications, lacks 

character or integrity, engaged in unethical or improper professional 

conduct, or willfully violated or willfully aided and abetted the 

violation of the federal securities laws or the rules and regulations 

issued thereunder.



Section: Penny stock bars; Existing (former) structure[A]: Auditing 

Oversight and Standards: Sarbanes-Oxley: Auditing Oversight 

and Standards: In SEC injunctive proceedings against persons involved 

in penny stock offerings, the court may prohibit the person from 

participating in penny stock offerings (§ 603).



Section: Associated persons of broker/dealers; Existing (former) 

structure[A]: Auditing Oversight and Standards: Sarbanes-

Oxley: Auditing Oversight and Standards: A broker/dealer may be subject 

to registration sanctions if:

; * an associated person of the broker/dealer is subject to an SEC 

order barring or suspending the right of the person to be associated 

with a broker or dealer; * an associated person is subject to final 

order of a state financial regulator, a federal banking agency or the 

National Credit Union Administration barring the person from 

association with a regulated entity or is based on violations of laws 

or regulations prohibiting fraudulent, manipulative or deceptive 

conduct.:



[A] Although SEC has had authority to establish and enforce auditing 

and accounting standards, it has relied upon self-regulatory bodies--

the AICPA and Financial Accounting Standards Board (FASB)--to establish 

such standards. Sarbanes-Oxley focuses primarily on auditing standards 

and practices by placing fundamental functions and responsibilities of 

auditing oversight and standards with the Board. Section 108(b) of 

Sarbanes-Oxley does, however, amend the Exchange Act to provide that 

that SEC may recognize accounting principles as “generally accepted” if 

those principles are established by a private standard-setting body 

described in section 108(b). This table focuses on the audit-related 

provisions of Sarbanes-Oxley.:



[B] Accounting standards (GAAP) are set primarily by the FASB. Other 

sources of GAAP include FASB task forces and AICPA staff.:



[C] In a recent speech, the AICPA’s President and chief executive 

officer (CEO) described the AICPA’s role in light of the Sarbanes-Oxley 

Act. According to the speech, AICPA will continue to serve as a means 

for CPAs to establish their own professional standards; function as a 

liaison between market institutions and corporations to help protect 

investors; perform research, educational and training functions; seek 

improvements in financial reporting; and promote strong corporate 

governance and internal control systems. A New Accounting Culture: 

Address by Barry C. Melancon, September 4, 2002, Yale Club - New York 

City, http://www.aicpa.org/news/2002/p020904a.htm.



[D] SEC Rel. Nos. 34-46421; 35-27563; IC-25720 (August 28, 2002). Under 

the rules, reporting persons must report transactions in the securities 

of their companies within two business days of the transaction, i.e., 

before the end of the second business day following the day on which 

the transaction is executed. There are two narrow exceptions to the 

rule. They define the date of execution differently with respect to two 

specific types of transactions in which the reporting person neither 

controls and nor selects the date of execution and may not know about 

it until he or she is timely notified.



Source: GAO legal analysis.



[End of section]



Appendix XXIV: GAO Contacts and Staff Acknowledgments:



GAO Contacts:



Davi M. D’Agostino (202) 512-8678

Orice M. Williams (202) 512-8678:



Acknowledgments:



In addition to those individuals named above, Kevin Averyt, Matthew 

Bridges, M’Baye Diagne, Heather Dignan, Lawrance Evans, Jr., Benjamin 

Federlein, Joe Hunter, Edwin Lane, May Lee, Mitchell Rachlis, Barbara 

Roesmann, Nicholas Satriano, Paul Thompson, and Richard Vagnoni made 

key contributions to this report.



[End of section]



Glossary:



Asset write-down/write off:



To charge an asset amount to an expense or loss in order to reduce the 

value of the asset and therefore, earnings. Occurs when an asset was 

initially overvalued or loses value.



Commercial paper:



Consists of short-term (up to 270 days), unsecured promissory notes 

issued by corporations to raise cash for current transactions, 

typically for financing accounts receivable and inventories. Many 

companies find commercial paper to be a lower-cost alternative to bank 

loans.



Derivative:



A security whose value depends on the performance of an underlying, 

previously issued securities. Used properly these instruments can be 

useful in reducing financial risk. Examples include, options, swaps, 

and warrants.



Goodwill:



The excess of the purchase price over the fair market value of an 

asset. Goodwill arises when the price paid for a company exceeds that 

suggested by the value of its assets and liabilities.



Impairment:



Generally refers to a reduction in a companies stated capital, however 

impairment can be used in any context such as “asset impairment” or 

“goodwill impairment.” Impairment is usually the result of poorly 

estimated gains or losses.



Option:



Contracts that gives the holder the option, or right, to buy or sell 

the underlying financial security at a specified price, called the 

strike or exercise price during a certain period of time or on a 

specific date. Options on individual stocks are called stock options.



Round-trip transactions:



A method used to inflate transaction volumes or revenue through the 

simultaneous purchase and sale of products between colluding (related-

party) companies.



Special purpose entity (SPE):



Also known as a “Special Purpose Vehicle.” A business interest formed 

solely in order to accomplish some specific task or tasks. A business 

may utilize a special purpose entity for accounting purposes, but these 

transactions must still adhere to certain regulations.



Used properly these subsidiary companies are used to isolate financial 

risk. Their asset/liability and legal status make its obligations 

secure even if the parent company goes bankrupt. Used improperly SPEs 

can serve to inflate revenue, hide debt or understate risk exposure. 

Enron used accounting loopholes to use SPEs improperly.



Warrant:



A security that gives the holder certain rights under certain 

conditions both determined by the issuer of the warrant. For example, 

an exchange privilege may allow the holders to exchange 1 warrant plus 

$5 in cash for 100 shares of common stock in the corporation, any time 

after some fixed date and before some other designated date.



FOOTNOTES



[1] A financial statement restatement occurs when a company, either 

voluntarily or prompted by auditors or regulators, revises public 

financial information that was previously reported. For purposes of 

this report, the restatement announcement is considered the market 

event to be measured.



[2] For the purposes of this report, an accounting irregularity is 

defined as an instance in which a company restates its financial 

statements because they were not fairly presented in accordance with 

generally accepted accounting principles (GAAP). This would include 

material errors and fraud.



[3] While several academic and nonacademic researchers have constructed 

and maintained their own financial restatement lists, these lists are 

generally proprietary and are not publicly available.



[4] We obtained stock prices from the NYSE Trade and Quote (TAQ) 

database, a subscription-based database of daily stock data. Our 

subscription ended in March 2002; therefore, we were only able to 

include announcements made before March 27 for purposes of our market 

capitalization impact analysis.



[5] Our TAQ subscription only included stock quotes through March 2002; 

therefore, the analysis of the intermediate impact on market 

capitalization includes only companies that announced restatements 

before December 31, 2001, because the calculation requires stock prices 

3 months before the restatement announcement and 3 months after the 

announcement.



[6] Unless otherwise indicated, we defined a large company as one 

having over $10 billion in market capitalization, which is the value of 

a company as determined by the market price of its issued and 

outstanding common stock (the number of shares outstanding multiplied 

by the current market price of a share). We found similar results 

defining a large company as having over $1 billion in total assets.



[7] For the average size, we report the trimmed mean [the average of 

the sample excluding the largest (by absolute magnitude) 5 percent]. We 

also report the median values to mitigate the effects of extreme 

outliers.



[8] In 2002, Nasdaq had 1,200 more companies listed than NYSE. The 

average market capitalization for NYSE-listed companies was $4.3 

billion, and for Nasdaq-listed companies it was $0.7 billion at the end 

of 2002.



[9] The UBS/Gallup Index of Investor Optimism.



[10] The four indexes are (1) One-Year Confidence Index, (2) Buy on Dip 

Confidence Index, (3) Crash Confidence Index, and (4) Valuation 

Confidence Index.



[11] SEC does not have the authority to bring criminal enforcement 

actions against securities law violators. However, SEC can refer these 

cases to the U.S. Department of Justice.



[12] Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204.



[13] U.S. General Accounting Office, SEC Operations: Increased Workload 

Creates Challenges, GAO-02-302 (Washington, D.C.: Mar. 5, 2002).



[14] U.S. General Accounting Office, The Accounting Profession: Major 

Issues: Progress and Concerns, GAO/AIMD-96-98 (Washington, D.C.: Sept. 

24, 1996); Protecting the Public Interest: Selected Governance, 

Regulatory Oversight, Auditing, Accounting, and Financial Reporting 

Issues, GAO-02-438T (Washington, D.C.: Mar. 5, 2002); Protecting the 

Public Interest: Considerations for Addressing Selected Regulatory 

Oversight, Auditing, Corporate Governance, and Financial Reporting 

Issues, GAO-02-601T (Washington, D.C.: Apr. 9, 2002); Accounting 

Profession: Oversight, Auditor Independence, and Financial Reporting, 

GAO-02-742R (Washington, D.C.: May 3, 2002); and GAO-02-302.



[15] GAO-02-483T.



[16] A full review involves an in-depth examination of the accounting, 

financial, and legal aspects of an issuer’s filing. A full financial 

review involves an in-depth accounting analysis of an issuer’s 

financial statements and management’s discussion and analysis or 

business plan disclosure.



[17] GAO-02-302.



[18] In 2001, 14,060 annual reports were filed with SEC.



[19] SROs are industry organizations responsible for regulating their 

member broker-dealers. Broker-dealers are firms that buy or sell 

stocks, bonds, and other securities for customers or for themselves.



[20] Subject to certain exemptions, the Investment Advisers Act defines 

“investment adviser as any person who, for compensation, engages in the 

business of advising others, either directly or through publications or 

writings, as to the value of securities or as to the advisability of 

investing in, purchasing, or selling securities, or who, for 

compensation and as part of a regular business, issues or promulgates 

analyses or reports concerning securities,” 15 U.S.C. § 80b-

2(a)(11)(2000). Generally, only advisers who have at least $25 million 

of assets under management or advise a registered investment company 

must register with SEC. The act prohibits fraud, imposes fiduciary 

duties on advisers with respect to their advice, requires advisers to 

maintain certain books and records, and gives SEC the authority to 

examine those registered as investment advisers for compliance with the 

Act.



[21] Although the term NRSRO was originally adopted by SEC solely for 

determining capital charges on different grades of debt securities 

under the Commission’s net capital rule, Rule 15c3-1 under the Exchange 

Act, its use has expanded over the years. It generally applies to 

credit rating agencies that SEC recognizes as NRSROs based on reviews 

about the rating organization’s operations, position in the 

marketplace, and other criteria. Currently, there are three NRSROs--

Moody’s Investors Service, Inc.; Fitch, Inc.; and the Standard and 

Poor’s Division of the McGraw-Hill Companies, Inc.



[22] FEI and M. Wu, “Quantitative Measures of the Quality of Financial 

Reporting,” (Morristown, NJ: Financial Executives International 

Research Foundation, 2001).



[23] Huron Consulting Group, “A Study of Restatement Matters,” 

(Chicago: Huron Consulting Group, 2002).



[24] Turner, L., J. Dietrich, K. Anderson, and A. Bailey, “Accounting 

Restatements,” Working Paper, (Washington, D.C.: U.S. Securities and 

Exchange Commission, 2001).



[25] For the purpose of this discussion, we define a large company as 

having over $1 billion in total assets.



[26] We did not attempt to test the relationship between where a 

company is listed (NYSE, Nasdaq, Amex, or other) and its likelihood of 

restating.



[27] The average market capitalization of Nasdaq-listed companies 

restating their financial statements was $766 million while the average 

for NYSE-listed companies restating their financial statements was $6.2 

billion. This indicates that NYSE companies restating due to accounting 

irregularities are bigger than their Nasdaq counterparts.



[28] Includes Nasdaq National Market System-and Small Cap venue-listed 

companies.



[29] We classified each of the 919 announced restatements we identified 

into one of nine categories: revenue recognition; cost or expense; 

acquisitions and mergers; in-process research and development; 

reclassification; related-party transactions; restructuring, assets, 

or inventory; securities related; and other. This classification 

process involved some judgment and other researchers could interpret 

certain restatements differently.



[30] WorldCom Press Release, “WorldCom Announces Intention to Restate 

2001 and First Quarter 2002 Financial Statements,” (Clinton, Miss., 

June 25, 2002).



[31] See appendixes V through XX for an in-depth discussion of Enron 

and 15 other restating companies. Our case study approach is explained 

in appendix IV.



[32] We used the average holding period abnormal return, a market-

adjusted performance measure calculated from a specified date before 

(for example, 1 trading day) to a specified date after (for example, 1 

trading day) the initial announcement of a financial statement 

restatement, to capture the average impact of a restatement 

announcement on the stock price of a restating company. In calculating 

this average, we first calculated the holding period abnormal return 

(the unexpected return due to the announcement) for each restating 

company’s stock over the company-specific time period. We then averaged 

the holding period abnormal returns for all restatement announcements. 

Details of these calculations are provided in appendix I.



[33] Of the 28 restating companies for which we were unable to find 

stock price information, 12 were acquired by or merged with another 

company, 4 filed for bankruptcy or closed, and in 2 cases trading was 

suspended for an extended period of time.



[34] This analysis is based on 689 restatements analyzed. Our previous 

discussion on restatement reasons included all 919 restatements.



[35] Our calculation assumes the market capitalization of the bankrupt 

companies went to zero.



[36] This understates the intermediate loss to shareholders due to 

restatements since it has now come to light that At Home’s stock price 

appeared to be artificially inflated during 1999 and 2000. During a 10-

month investigation, New York State Attorney General’s Investor 

Protection Bureau uncovered evidence that suggested a Merrill Lynch & 

Company analyst gave strong investment ratings to specific companies 

while privately denigrating them. The New York State Attorney General 

alleged these ratings were biased and distorted in an attempt to secure 

or maintain contracts for its investment banking services. At Home 

Corporation was one of the companies whose stock price benefited from 

these alleged conflicted recommendations. By the end of 2001, its stock 

price had fallen from $86 (60 days after the restatement announcement) 

to less than a penny a share. Thus, our results are skewed since our 

analysis captures only the period in which At Home’s stock price was 

artificially inflated but not the period corresponding to the dramatic 

fall in price.



[37] The UBS/Gallup Poll of Investor Attitudes determines a monthly 

Index of Investor Optimism. The Index, composed of “personal” and 

“economic” dimensions, yields an overall estimate of investor 

confidence. The personal element asks investors (defined as any private 

household with at least $10,000 in investable assets, or nearly 40 

percent of all U.S. households) how confident they are about increasing 

their income and achieving investment goals. The economic dimension 

poses questions about macroeconomic influences such as unemployment and 

overall stock market performance. A positive result indicates optimism, 

while negative result denotes pessimism. In a statistical study of the 

poll’s accuracy, Lawrence Klein, a Nobel Laureate in Economics and 

Professor at the University of Pennsylvania, endorsed the indicator as 

“at least as good as and probably better, in terms of accuracy, than 

the competing [indexes].”



[38] These indexes have been released semiannually since 1989 and 

monthly since July 2001.



[39] M. Wu, “Earnings Restatements: A Capital Market Perspective,” 

Stern School of Business Working Paper (New York University, January 

2002).



[40] Redemption occurs when a shareholder sells (or redeems) shares 

back to the mutual fund.



[41] AAERs are used by SEC staff to catalog accounting-related civil or 

administrative actions.



[42] GAO-02-302.



[43] Remarks by former Chairman Arthur Levitt, SEC, “The Numbers Game,” 

New York University Center for Law and Business, (New York, N.Y., Sept. 

28, 1998).



[44] The Financial Fraud Task Force consists of a team of accountants 

and lawyers, who focus exclusively on financial reporting and 

accounting investigations.



[45] A disgorgement sanction requires the return of illegal profits. 

See U.S. General Accounting Office, SEC Enforcement: More Actions 

Needed to Improve Oversight of Disgorgement Collections, GAO-02-771 

(Washington, D.C.: July 12, 2002) for disgorgement collection 

information.



[46] SEC can also initiate contempt proceedings and issue reports of 

investigation when appropriate.



[47] Appendix XXI lists the case names of the AAERs we reviewed as well 

as 78 additional AAERs issued from March through June 2002 that are not 

included in our analysis.



[48] See appendixes V through XX for specific examples of enforcement 

actions taken against selected companies that have announced plans to 

restate their financial results.



[49] The Sarbanes-Oxley Act addresses officer and director bars.



[50] Officer and director bars may be issued for a period of time, 

conditional or unconditional, or they may be permanent.



[51] Excludes CEOs, CFOs, and CPAs.



[52] For a detailed discussion of SEC’s actions against Adelphia, 

Critical Path, Rite Aid, and Waste Management, see appendixes V, VII, 

XIII, and XIX, respectively.



[53] As of May 2002, the “Big Five” accounting firms were KPMG LLP, 

Arthur Andersen LLP (Arthur Andersen), Ernst & Young LLP, 

PricewaterhouseCoopers LLP, and Deloitte & Touche LLP. On June 15, 

2002, Arthur Andersen was convicted on one felony count of obstruction 

of justice. Although Arthur Andersen planned to appeal the conviction, 

the firm notified SEC it planned to cease practicing before the 

Commission by August 31, 2002. If the appeal fails, the conviction 

would be grounds for automatic suspension of the firm’s ability to 

practice before SEC, leaving only the “Big Four” accounting firms. See 

17 C.F.R. § 201.102(e)(2002). On September 2, 2002, Arthur Andersen 

announced that it surrendered to state regulators all licenses “to 

practice public accountancy.”



[54] Rule 102(e), 17 C.F.R. § 201.102(e)(2002), authorizes SEC to take 

action against those who do not have requisite qualifications, engage 

in unethical or improper professional conduct, or willfully violate or 

aid and abet violations of the securities laws. Pursuant to the rule 

SEC may temporarily or permanently deny an individual the privilege of 

appearing or practicing before SEC.



[55] Rule 102(e)(2) also provides that any licensed professional whose 

license to practice has been revoked or suspended in any state or who 

has been convicted of a felony or misdemeanor involving moral turpitude 

shall be suspended from appearing or practicing before SEC.



[56] Under Section 10A of the Exchange Act, 15 U.S.C. § 78j-1(2000), an 

auditor who becomes aware that an illegal act occurred or may have 

occurred must take certain actions, which include informing the 

appropriate level of the company’s management and directors and, if the 

company fails to take adequate remedial action, the auditor may resign 

from the engagement and must furnish pertinent information to the 

Commission.



[57] GAO-02-742R, GAO-02-483T, and GAO-02-601T.



[58] GAO/AIMD-96-98.



[59] The accounting and reporting model under GAAP is actually a mixed-

attribute model. Although most transactions and balances are measured 

on the basis of historical cost, which is the amount of cash or its 

equivalent originally paid to acquire an asset, certain assets and 

liabilities are reported at current values either in the financial 

statements or related notes. For example, certain investments in debt 

and equity securities are currently reported at fair value, receivables 

are reported at net realizable value, and inventories are reported at 

the lower of cost or market value. Further, certain industries such as 

brokerage houses and mutual funds prepare financial statements on a 

fair-value basis.



[60] GAO-02-483T.



[61] Special purpose entity is a business entity created solely to 

carry out a special purpose, activity, or series of transactions 

directly related to its special purpose.



[62] AICPA establishes professional standards, monitors compliance with 

professional standards, and disciplines members for improper acts and 

substandard performance.



[63] The Panel on Audit Effectiveness Report and Recommendations, 

August 31, 2000.



[64] Although additional analysis such as who the independent auditors 

were and their role in prompting the restatement for the 919 

restatements identified was beyond the scope of this review, we 

included this type of analysis in our 16 case studies (app. V through 

XX). We plan to include a more comprehensive analysis of this issue in 

our work on mandatory audit rotations as required by the Sarbanes-Oxley 

Act.



[65] Auditor independence standards require that the audit organization 

and auditor be independent in fact and in appearance.



[66] KPMG LLP was the independent auditor for AIM Funds, a family of 

mutual funds managed by AIM Management Group, Inc., which offers 

different funds and portfolios including Short-Term Investments Trust, 

a money market fund in which KPMG LLP had an investment. KPMG LLP 

neither admitted nor denied the charges.



[67] To determine the information being provided by securities analysts 

and credit rating agencies before and after several restatement 

announcements, we conducted 16 case studies of public companies that 

have restated or announced the need to restate their financial results.



[68] In U.S. General Accounting Office, Securities Regulation: 

Improvements Needed in the Amex Listing Program, GAO-02-771 

(Washington, D.C.: July 12, 2002), we reviewed Amex’s compliance with 

its listing standards, which they refer to as guidelines.



[69] According to NASD’s news release, the September 23, 2002, 

settlement between NASD and Salomon resolves the NASD investigation 

into Salomon’s Winstar reports and does not address other, larger 

Salomon-related research analyst investigations currently under way by 

NASD and other regulators.



[70] When it appears that securities laws have been violated, CorpFin 

may refer matters to Enforcement.



[71] The 13 companies whose CEOs and CFOs did not file the oath were 

(1) ACT Manufacturing, Inc.; (2) Adelphia; (3) CMS Energy Corp.; (4) 

Consolidated Freightways; 

(5) Dynegy, Inc.; (6) Enron; (7) Gemstar-TV Guide International, Inc.; 

(8) IT Group, Inc.; (9) The LTV Corporation; (10) McLeodUSA 

Incorporated; (11) Qwest Communications Int’l, Inc.; (12) TruServ 

Corporation; and (13) WorldCom.



[72] The SROs are to implement the specific reforms on a staggered 

schedule, ranging from 60 days to 180 days from approval.



[73] On September 13, 2002, Amex announced that its board had approved 

a proposal to enhance its corporate governance rules, which Amex 

planned to submit to SEC for its review and approval. GAO is in the 

process of reviewing various aspects of Amex, Nasdaq, and NYSE’s 

listing programs, including the recent changes to their corporate 

governance standards.



[74] Both proposals include certain exemptions for companies with a 

controlling shareholder.



[75] Regulation FD is an issuer disclosure rule that addresses 

selective disclosure, 17 C.F.R. Part 243. It provides that when an 

issuer, or person acting on its behalf, discloses material nonpublic 

information to certain enumerated persons (in general, securities 

market professionals and holders of the issuer’s securities who may 

well trade on the basis of the information), it must make public 

disclosure of that information.



[76] Both proposals address resources for audit committees, but do not 

require that other committees also have their own resources. According 

to NYSE officials, its proposal suggests that companies “should” 

provide key committees with their own resources .



[77] See SEC Release No. 34-34616.



[78] See SEC Release No. 34-39457.



[79] GAO-02-302.



[80] SEC’s turnover of 9 percent in 2001 was lower than its 2000 rate 

but remained higher than the governmentwide rate. SEC also had hundreds 

of staff vacancies in 2001.



[81] Accountant positions must be filled competitively and are subject 

to various requirements as competitive service appointments while 

attorney positions are in the excepted service and are not subject to 

the same requirements.



[82] U.S. General Accounting Office, Securities and Exchange 

Commission: Human Capital Challenges Require Management Attention, GAO-

01-947 (Washington, D.C.: Sept. 17, 2001).



[83] The Investor and Capital Markets Fee Relief Act, Pub. L. No. 107-

123, exempts SEC from the provisions of Title 5 of the U.S. Code 

related to civil service compensation.



[84] GAO-02-302.



[85] Our sources included Financial Executives International (FEI) and 

M. Wu, 2001, “Quantitative Measures of the Quality of Financial 

Reporting,” Internet-Based Special Report, FEI Research Foundation; 

Jickling, M., 2002, “Accounting Problems Reported in Major Companies 

Since Enron,” Congressional Research Service (CRS) Report for Congress; 

Palmrose, Z.V., V. Richardson, and S. Scholz, 2002, “Determinants of 

Market Reactions to Restatement Announcements,” Working Paper, 

University of Southern California; Palmrose, Z.V., and S. Scholz, 2002, 

“Accounting Causes and Litigation Consequences of Restatements,” 

Working Paper, University of Southern California; Huron Consulting 

Group (HCG), 2002, “A Study of Restatement Matters,” Internet-Based 

Report, Huron Consulting Group; Turner, L., J. Dietrich, K. Anderson, 

and A. Bailey, 2001, “Accounting Restatements,” Working Paper, SEC; and 

Wu, M., 2002, “Earnings Restatements: A Capital Market Perspective,” 

Working Paper, New York University.



[86] We were able to crosscheck portions of our list with lists 

compiled by CRS, SEC, and Turner et al.



[87] Based on discussions with SEC officials, we included restatements 

that stemmed from the issuance of SEC Staff Accounting Bulletin No. 101 

(SAB 101), “Revenue Recognition in Financial Statements--Frequently 

Asked Questions and Answers,” (December 3, 1999). According to SEC 

officials, SAB 101 represented a clarification of existing guidance and 

any resulting restatement would have been to correct a previous 

misstatement of financial reports.



[88] We subsequently used SEC’s Electronic Data Gathering Analysis and 

Retrieval database--through which public companies electronically file 

registration statements, periodic reports, and other forms--to verify 

certain information provided in company press releases and press 

articles.



[89] Some restatement announcements cited multiple accounting issues 

(for example, improper revenue recognition, improper recording of cost 

of goods sold, and improper valuation of inventory). In these cases, we 

included the restatement in all applicable categories, and in the 

analyses involving stratification by restatement reason, we assigned 

equal fractional weights to the reasons. For the above example, we 

would assign each reason (revenue, cost/expense, and restructuring/

assets/inventory) a weight of one-third when calculating the market 

capitalization loss.



[90] To ensure the reliability of the TAQ data, we randomly cross-

checked TAQ data with data provided by Nasdaq, Yahoo! Finance, and 

other publicly available stock data sources.



[91] Companies announcing financial restatements frequently were forced 

to delay their required SEC filings or were in violation of other 

listing standards and were subsequently delisted from NYSE, Nasdaq, or 

Amex within 60 trading days of the restatement announcement. In some 

cases, the stock of the delisted company moved to the OTC bulletin 

board or Pink Sheets. In several cases, these companies ultimately 

filed for bankruptcy or were acquired by other companies.



[92] We included the trading days prior to a restatement announcement 

to address possible information leakage prior to the announcement.



[93] Wilshire Associates Incorporated, an investment advisory company, 

provides widely quoted and tracked market indices.



[94] In a standard financial econometrics text, Campbell, Lo, and 

MacKinlay (1997) provide a detailed discussion of the market model. 

While the market model we use is very simple, according to these 

authors it is not clear that using a more sophisticated model is 

necessary.



[95] The event itself is not included in the estimation window so that 

the event does not influence the estimates of the model’s parameters.



[96] We obtained the number of shares outstanding for a company from 

the company’s Form 10-Q covering the 3-month period during which the 

restatement announcement was made. If this were not available, we used 

either the closest Form 10-Q, appropriate Form 10-K, or other company 

sources. Specifically, we obtained the average number of diluted shares 

over this period. Diluted shares are the pools of common shares 

outstanding issued by a company, combined with the shares that would be 

created upon the conversion of the company’s options, warrants and 

convertible securities. Our use of diluted rather than basic shares 

provides a more accurate assessment of the overall impact on 

shareholders.



[97] We also calculated the individual cumulative abnormal returns for 

each case and the cumulative average abnormal return overall, and our 

results for the immediate event window were similar to those reported 

using holding period abnormal returns. Campbell, Lo, and MacKinlay 

(1997) detail this alternative method.



[98] See Campbell, Lo, and MacKinlay (1997).



[99] AAERs are used by SEC staff to catalog accounting-related civil or 

administrative actions. For a detailed listing of the AAERs included in 

our analysis, please see appendix XXI.



[100] If the Division of Corporation Finance through its review process 

of companies’ filings becomes aware of securities laws violations by 

companies, it can make enforcement referrals to Enforcement.



[101] For an explanation of how we selected the 16 companies, see 

appendix I (Objectives, Scope and Methodology).



[102] Pursuant to the automatic stay provisions of Section 362 of the 

Federal Bankruptcy Code, 11 U.S.C. § 362, actions to collect pre-

petition indebtedness and virtually all litigation against the debtor 

that was or could have been brought prior to commencement of a Chapter 

11 bankruptcy proceeding are stayed unless the stay is lifted by the 

court.



[103] A back-pocket deal is a fictitious sale that would be recorded as 

revenue only if it was needed to meet earnings targets.



[104] SEC subsequently charged others who were also involved, including 

William H. Rinehart, who was charged with misleading the auditors.



[105] See 15 U.S.C. § 78m (2000); respectively, and SEC Regulation 13A, 

17 C.F.R. § § 240.13a-13, et seq. (2002).



[106] Structured finance arrangements are a technique whereby certain 

assets with more or less predictable cash flows can be isolated from 

the originator and used to mitigate risks (e.g., transfer of foreign 

exchange, contract performance, and sovereign risk), and thus secure a 

credit.



[107] A hedge is an investment made in order to reduce the risk of 

adverse price movements in a security by taking an offsetting position 

in a related security, such as an option or a short sale.



[108] An SPE is a business interest formed solely in order to 

accomplish some specific task or tasks. A business may utilize an SPE 

for accounting purposes, but these transactions must still adhere to 

certain regulations.



[109] For SPE partnerships, consolidation was not required if, among 

other things, an independent third party invested at least 3 percent of 

the capital. The Financial Accounting Standards Board is proposing to 

raise this threshold and change other conditions for avoiding 

consolidation on the sponsor’s balance sheet.



[110] Pursuant to the automatic stay provisions of Section 362 of the 

Federal Bankruptcy Code, 11 U.S.C. § 362, actions to collect pre-

petition indebtedness and virtually all litigation against the debtor 

that was or could have been brought prior to commencement of a Chapter 

11 bankruptcy proceeding are stayed unless the stay is lifted by the 

court.



[111] Pursuant to the automatic stay provisions of Section 362 of the 

Federal Bankruptcy Code, 11 U.S.C. § 362, actions to collect pre-

petition indebtedness and virtually all litigation against the debtor 

that was or could have been brought prior to commencement of a Chapter 

11 bankruptcy proceeding are stayed unless the stay is lifted by the 

court.



[112] In an acquisition, goodwill is the excess of purchase price over 

the fair market value of the net assets of the acquired company.



[113] “MicroStrategy’s Curious Success,” Forbes (March 6, 2000).



[114] Compliance with SOP 97-2 is required by generally accepted 

accounting principles (GAAP); it provides guidance on whether software 

license sales revenue can be recognized at the time of sale, or whether 

it must be recognized with the subscription method or the percentage of 

completion method of accounting, spreading the recognition of revenue 

over the entire contract period.



[115] On January 26, 2000, MicroStrategy implemented a 2:1 stock split 

of its common stock.



[116] On July 30, 2002, MicroStrategy implemented a 1:10 reverse stock 

split of its common stock.



[117] Pursuant to the automatic stay provisions of Section 362 of the 

Federal Bankruptcy Code, 11 U.S.C. § 362, actions to collect 

prepetition indebtedness and virtually all litigation against the 

debtor that was or could have been brought prior to commencement of a 

Chapter 11 bankruptcy proceeding are stayed unless the stay is lifted 

by the court.



[118] This submission was made pursuant to a procedure that allows for 

the prior review by OCA of accounting for transaction considered to be 

complex or highly technical in nature.



[119] Pursuant to the automatic stay provisions of Section 362 of the 

Federal Bankruptcy Code, 11 U.S.C. § 362, actions to collect 

prepetition indebtedness and virtually all litigation against the 

debtor that was or could have been brought prior to commencement of a 

Chapter 11 bankruptcy proceeding are stayed unless the stay is lifted 

by the court.



[120] According to comments received from the company, Waste 

Management, Inc., is a relatively new company created in 1998 when USA 

Waste Services, Inc. of Houston (New Waste Management) acquired the 

Chicago based Waste Management Inc. (Old Waste WMX), and then adopted 

the name Waste Management. For purposes of this case, we use Waste 

Management to cover restatement announcements of both the Old Waste WMX 

and New Waste Management.



[121] Old Waste Management was listed on NYSE prior to the merger in 

which USA Waste Services acquired Old Waste Management. Old Waste 

Management changed its name to Waste Management Holdings, Inc. on July 

16, 1998, and is no longer a publicly traded company.



[122] These allegations are not yet proven.



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Room LM Washington,



D.C. 20548:



To order by Phone: 	



Voice: (202) 512-6000:



TDD: (202) 512-2537:



Fax: (202) 512-6061:



To Report Fraud, Waste, and Abuse in Federal Programs:



Contact:



Web site: www.gao.gov/fraudnet/fraudnet.htm E-mail: fraudnet@gao.gov



Automated answering system: (800) 424-5454 or (202) 512-7470:



Public Affairs:



Jeff Nelligan, managing director, NelliganJ@gao.gov (202) 512-4800 U.S.



General Accounting Office, 441 G Street NW, Room 7149 Washington, D.C.



20548: