One of the main victims of Enron’s collapse has been the reputation of accounting firms — the so-called gatekeepers who are supposed to prevent corporations from financial skulduggery. But in trying to fix things, critics who are calling for tighter accounting regulations may be looking in the wrong place. The problems that felled Enron — wildly inflated earnings and enormous off-balance-sheet costs — were not the work of Enron’s auditor, Arthur Andersen. The fancy financing and fancier bookkeeping were, by most accounts, masterminded by Enron’s chief financial officer, Andrew Fastow. And, far from being a renegade, Fastow (who declined to testify before Congress earlier this month) was just doing his job — or, at least, he was doing precisely what today’s CFOs are being told to do.
The CFO, traditionally, was the executive entrusted with ensuring that a company operates with financial discipline — not excess. But in a business environment where investors are demanding ever-increasing earnings every quarter and anything less than 20 percent earnings gains is considered lackluster performance, CFOs are under steadily escalating pressure to fudge the books to make things look better than they really are.
This is a relatively recent phenomenon. It wasn’t that long ago, suggests Warren Bennis, a professor of management at the University of Southern California, that a company’s chief financial officer was considered staff, not part of the executive elite. “Even 12 or 13 years ago,” he says, “CFOs were not regularly included at the table in executive meetings. Now the CFO is part of the club.”
A few decades ago, the CFO’s main job was confined to acting as the link between a company and its bankers. No more. In the go-go 1980s and especially the ’90s boom years, daring corporate finagling became the name of the game — and in the case of many recent technology start-ups, which had no earnings and sometimes not even any revenue, the only game. There were convertible bonds, junk bonds, derivatives, venture funds, pension funds, hedge funds, tracking stocks, spinoffs, joint ventures and, of course, on the cost side, a bewildering array of gimmicks, from offshore domicile changes to leasing deals, deferred employee compensation plans and purportedly one-time expense write-offs. Few if any of these maneuvers had anything to do with producing anything (except in some cases more money), but they did make a corporation’s books look good. And responsibility for executing these maneuvers belonged to the new star executive player — the CFO.
“The CFOs, who were supposed to be policing managers, have stopped policing and have become facilitators for managers,” says Bruce Greenwald, a professor of finance at Columbia University’s Graduate School of Business.
And since the CFO, quite often, is the only member of the executive team who actually understands the details of modern corporate finance, the position has become a hot spot for corporate trouble.
“In the CFO, you have someone with highly technical skills that these days the CEO and COO often don’t even understand, yet there has to be this web of trust,” says Bennis. “It’s a paradox.”
At the same time, says Bennis, the CFO is under constant pressure from the CEO, COO and president of the company to deliver ever increasing earnings and revenues. It is, he suggests, a recipe for Enron-style debacles.
Take Cisco Systems, for example. Long hailed as the paradigm of a technology company, Cisco, once one of the world’s fastest growing enterprises, has seen sales slump and its market value — as measured by its share price — fall by almost two-thirds over the past two years, for a loss to shareholders of some $276 billion. In an effort to stave off investor concerns, Cisco’s CFO, Larry Carter, resorted to accounting tricks. Last November, he reported as profit $290 million that the company “earned” by selling off excess inventory, but that same inventory had been written off seven months earlier as “worthless.” In other words, it was really counted twice. That same year, just as the company was getting set to close the books on its 2001 second quarter, Carter reportedly personally directed employees to race around a San Jose warehouse loading as many boxed machines as possible onto trucks before midnight of Jan. 27, so that they could be considered “sold” for accounting purposes.
There have been so many similar sleight-of-hand maneuvers in Cisco’s books over the years that some experts say they aren’t sure how profitable the company has been — or even whether it has always been profitable — since as far back as 1990.
Tyco, like Cisco, is another acquisition-crazed firm whose CEO has previously boasted that the company will become “the next General Electric.” But Tyco’s shares have also tanked recently, as nervous investors, post-Enron, began getting skittish about needlessly confusing books. Instead of growing further, the company now is being split into four independent smaller entities.
Tyco CFO Mark Swartz is a master of obfuscation, analysts say. There are charges, denied by Swartz and Tyco CEO L. Dennis Kozlowski, that the company routinely had acquisition targets restate their last earnings results downward, so that the deals would look better after Tyco took over. The company also borrowed heavily from its banks to shore up its balance sheet as its stock tanked and doubts rose about its ability to meet its debt repayment schedule.
But fuzzy math and creative accounting have not been limited to companies in the so-called new economy. In recent months, the CFOs at AT&T and General Electric have also drawn fire for their efforts to boost earnings by playing with the numbers.
In late January, AT&T’s CFO, Chuck Noski, told the Financial Times the company would no longer routinely use “one-time” write-offs to account for restructuring costs, such as employee expenses for layoffs. Such one-time charges, while reducing earnings, are presented as though they are not reflective of the company’s true profitability. In fact, industry critics note that such one-off charges have become routine in U.S. business, raising questions as to whether they should really be considered one-time expenses. Shortly after Noski’s promise, in fact, the company took another $1 billion charge as it laid off another 5,000 workers.
GE, too, has made regular, and some would argue excessive, use of supposedly one-time restructuring charges. Last year the company, long a darling of investors who considered its erstwhile CEO Jack Welsh a model manager, came under criticism for the complexity of its own books. In an article in Fortune Magazine a year ago, reporter Jeremy Kahn called his efforts to untangle the company’s finances “Accounting in Wonderland.” Post-Enron, the company has had to reassure investors that it is as profitable as its books say it is.
According to a recent study by the Center for Economic and Business Research Ltd., a respected British think tank, the CFOs at Enron, Tyco, Cisco, AT&T and G.E. are hardly alone in using creative or aggressive accounting to improve the look of their companies’ financials. The London think tank reports that after comparing the earnings reports of companies listed on the New York Stock Exchange with statistics from the U.S. Commerce Department’s Bureau of Economic Analysis (in which some of the more commonly used accounting “adjustments” are pared away), it appears that U.S. corporate profits in 2001 were overstated by 27 percent, or about $130 billion.
If those numbers are correct, the Dow Jones Industrial Average should be trading at between 5,500 and 7,500, instead of floating around the 9,500-10,000 level, according to the study.
A typical explanation for why accounting firms are failing to sound the alarm bell when confronted with the current state-of-the-art of books cooking is that those same firms make far more money from consulting deals with the corporations they’re auditing than from the auditing contracts. But while it’s true that corporate finance would be a good deal clearer and more honest if the accounting firms could maintain an arm’s-length relationship with the companies they audit, investors have a right to ask why corporate finance officers don’t just start telling it like it is, so they wouldn’t need to be challenged by the auditors.
But don’t expect any change in the finance department ethos soon. Look what happened to Roy Olofson. When the now former vice president for finance at Global Crossing raised questions about that company’s accounting shenanigans, he was fired. Now, although his charges about dicey transactions are proving to be so true that Global Crossing is seeking bankruptcy protection, the company’s response has been a smear campaign against him designed to paint him as just a disgruntled employee.
What a difference a dollar makes, or rather, hundreds of billions of dollars.
The strikingly divergent responses of the American government to diplomatic crises involving first Russia and then China in recent weeks speak volumes about what the Bush administration considers strategically important. If you follow the money, it also suggests that the Bush administration’s handling of China is being driven more by corporate interests than national security.
In the case of Russia, we had the discovery of a Russian spy in the upper echelons of the FBI’s spy-catching apparatus. Robert Hanssen was essentially a relic — a holdover from the old days of the Soviet “Evil Empire.” Despite this, the Bush team responded to his unearthing with a macho Cold War-era shutdown of the Russian Embassy, which was ordered to send home 50 of its staff. This predictably led to a reciprocal order in Moscow for 50 American Embassy personnel to pack their bags. More importantly, the incident, and the aggressive Bush response, has led to a poisoning of relations between the U.S. and Russia, where many people now feel that they are still being punished by America for the actions of a government they overthrew a decade ago.
In the most recent crisis with China, on the other hand, a real challenge has emerged. Whatever the truth about who hit whom, the end result of the fatal midair collision of a U.S. spy plane and a Chinese fighter is that the Chinese have possession of an American air crew and a top-secret American aircraft that, by all accounts, was flying over international waters at the time it was intercepted by Chinese warplanes.
Although China’s treatment of the crew and entry into the plane clearly violate international law and convention, the same Bush team that went ballistic over Russian spying has acted with incredible restraint. Instead of demanding immediate release of the crew and taking the usual steps in such circumstances, the Bush administration has taken a softer stance. Bush has not demanded any deadline for China to release the crew and plane. The administration “requests permission” to see the captured crew, it expresses “regret” about the incident and has made it clear that it hopes the incident won’t lead to problems in the longer-term relationship between the two countries. Beijing could have gotten much stiffer treatment. Bush could have called the Chinese ambassador onto the carpet and chewed him out at the White House, as Chinese officials did to America’s ambassador in Beijing. He could have threatened to cancel military cooperation agreements and instead announce a joint naval exercise with the Japanese or Taiwanese. Even worse, Bush could have threatened to block the Chinese from hosting the 2008 Olympics. He didn’t.
So why the iron fist for Russia and the kid-glove treatment for China?
Behind all the scholarly and diplomatic blather about the need to be sensitive to internal political disputes in China, basically it comes down to money and to the power and influence of American corporate interests in Washington.
With Russia’s economy still in tatters, and with little prospect of a revival any time soon, American investment there is still relatively small. In China, by contrast, American corporations have invested hundreds of billions of dollars. Some, like General Motors, IBM and General Electric, hope to gain a foothold in the Chinese domestic market. Others — indeed the vast majority of U.S. companies — see China as an offshore cheap-labor site where they can build things to sell back into the U.S.
The U.S. Department of Commerce reports that in 1999, U.S. corporate assets in China and Hong Kong were worth $81 billion, and had sales of $66 billion and profits of $3 billion. Indeed, much of the $70 billion U.S. trade deficit with China represents sales by U.S.-owned or partially U.S.-owned manufacturing facilities in China. By contrast, U.S. corporate assets in all of Eastern Europe totaled just $30 billion, and the portion of those assets located in Russia are so small that the Commerce Department doesn’t separate that figure in its annual Survey of Current Business.
The Bush administration doesn’t want to jeopardize the interests of those corporations that are in China. Most of them, like AT&T, AIG, Boeing, Microsoft, General Motors and an industry PAC called Americans for Free International Trade, were major contributors to the Republican Party and the Bush campaign. The irony, of course, is that China needs American investment far more than America needs to invest in China, since China’s aggressive economic development plan is premised on continued and increased foreign corporate investment in China.
Of course, kowtowing to China on behalf of American corporate interests would be nothing new. The Clinton administration pushed successfully to end the annual congressional review of favored trade relations with China — probably the strongest lever the U.S. had to protect human rights there — precisely because American business didn’t want that issue interfering with its efforts to make a buck in the Middle Kingdom.
Yet the history of the most-favored-nation debates shows that the threat to trade and investment is the one thing almost guaranteed to get the attention of Beijing’s ruling elite.
If Bush were to demand return of the American plane and crew on pain of suffering economic sanctions, those airmen and women would be on the next flight home. But that could come with a price tag. American companies competing with European and Japanese firms next time around for contracts in China might then find themselves suddenly losing out on deals they should have won.
That’s why the crew may have to cool their heels in captivity in Hainan for a while, while Chinese intelligence experts comb through their grounded airplane and see how much they can make the Bush team squirm.
Mumia Abu-Jamal, the black journalist on death row in Pennsylvania who has become an international cause célèbre in part because of determined efforts by state authorities and police unions to keep his voice out of print and off the air, filed a lawsuit Wednesday in federal court in Pittsburgh seeking to suppress the publication of a book about his case penned by one of his former key attorneys.
The suit, scheduled to be heard Monday, comes only days after Abu-Jamal abruptly fired his team of lawyers, arguing that attorney Daniel Williams violated legal ethics and the sanctity of the attorney-client relationship by writing a book purporting to be the “inside story” of his trial, conviction and ongoing appeal of a death penalty sentence for the 1981 slaying of Daniel Faulkner, a white Philadelphia police officer.
Jere Krakoff, Abu-Jamal’s attorney in the case, declined to comment on the suit. The lawsuit, which seeks monetary damages as well as a preliminary injunction against publication of “Executing Justice: An Inside Account of the Mumia Abu-Jamal Case,” names as defendants both Williams and his publisher, St. Martins Press.
St. Martins spokesman John Murphy said Thursday, “We’re proceeding with the publication of the book, which is shipping April 11, to be due out in May.” Williams insists that his book uses only information that was already in the public domain and was written with the knowledge of his client, though without specific approval of the manuscript. Williams claims to be puzzled by Abu-Jamal’s latest move.
“This is not the man I know,” he says. “The man whose recent book was called ‘All Things Censored’ is trying to censor my book, which is manifestly helpful to his case. It’s simply mind-boggling.” Williams says the move raises the “disturbing possibility Mumia is being manipulated, because the Mumia Abu-Jamal I know would never countenance any form of censorship.”
In his suit, Abu-Jamal argues that Williams, in publishing a book about the case, violated his fiduciary duty to fully defend his client, and that it should be suppressed. And legal sources suggest he may have had no alternative but to do so, since failure to seek an injunction against publication might have been construed as tacit acceptance of the statements made in the book.
But if Abu-Jamal is attempting to keep Williams’ book out of public hands, the strategy of going to court could backfire. Traditionally, American judges, particularly federal judges, have been loath to engage in prior restraint, preferring to allow publication and then consider awards where damage can be proven. More often, however, courtroom efforts to ban a publication merely serve to boost reader interest and book sales.
Given that the Abu-Jamal book itself, galleys of which have already been made available for review by the publisher, makes a forceful argument that Abu-Jamal deserves a new, fairer trial on his first-degree murder conviction, this latest brouhaha over publication of the book and the firing of the legal defense team could end up working in his favor — even if the effort does cast him in the unflattering role of censor.
Abu-Jamal has been on Pennsylvania’s death row now for over 18 years. The governor has signed two death warrants, both of which were vacated because of pending appeals. Presently, his case is in the hands of Federal District Court Judge William H. Yohn Jr. in Philadelphia, who is considering whether to grant a hearing on Abu-Jamal’s 29-count habeas corpus appeal of his state conviction, which was filed over a year ago.
In a stunning turn of events in the decades-old case of convicted cop killer and black Philadelphia journalist Mumia Abu-Jamal, the death-row inmate has fired his entire legal team. The change came following word that one of Mumia’s lawyers, Dan Williams, is about to publish an inside account of the case, its fractious defense team and a “fringe element” in Abu-Jamal’s worldwide network of supporters that the attorney says is undermining attempts to gain his client a new trial.
Abu-Jamal, who is currently in solitary confinement in Pennsylvania’s maximum-security SCI-Green prison, last week fired off a pencil-and-paper legal brief to the judge, William H. Yohn Jr., asking permission to dump Williams along with lead counsel Leonard Weinglass and several supporting attorneys on the case. The internationally known convict, who is in prison for the 1981 killing of white Philadelphia police officer Daniel Faulkner, contends that Williams’ book, “Executing Justice: An Inside Account of the Mumia Abu-Jamal Case,” to be published in April by St. Martin’s Press, breaches the lawyer-client relationship and violates legal ethics. Abu-Jamal also asked for a delay in the scheduling of any hearing on his pending habeas corpus appeal, to allow his new, and as yet undetermined, defense team to get up to speed on the complex case.
Williams, who says he “continues to believe that Mumia is innocent and, most importantly, has never been given a meaningful opportunity to refute the prosecution’s flawed case against him,” insists that there has been no violation of ethics and no breach of confidence with his client. “Everything in this book was already on the public record,” he says, adding that his detailed accounts of disputes and conversations among defense attorneys were all gathered where other people — usually members of the Abu-Jamal support network — were present. He also insists that Abu-Jamal long knew of Williams’ plans to write a book about the case.
“I provided to Mumia, through his agent, a detailed synopsis of each chapter before I wrote the book,” Williams says. “There is nothing in this book that violates legal ethics.”
But there is plenty for some of Abu-Jamal’s most ardent and vocal supporters to take issue with. Williams says certain Mumia backers set back both the legal and public relations efforts by trying to depict Abu-Jamal as the victim of a grand law-enforcement conspiracy, rather than concentrating on the effort to prove he was wrongly convicted of first-degree murder in Faulkner’s death.
In “Executing Justice,” Williams takes readers through the original 1982 trial in which a jury of two blacks and 10 whites convicted Abu-Jamal of first-degree murder and sentenced him to death. And he describes a 1995 rehearing of the facts in the case, at which serious questions were raised about the integrity of earlier prosecution witnesses. Williams argues there is good reason to believe Abu-Jamal did not fire the first shot back in 1981, as claimed by the prosecution. Instead, he says the evidence suggests Faulkner shot Jamal in the chest first, before being shot fatally himself. While Williams favors a scenario that has someone else firing the fatal shot that killed the officer, he seems to suggest that this is less important than proving that Abu-Jamal was not the coldblooded assassin the prosecution made him out to be. His view is that it would be much easier to overturn Abu-Jamal’s death sentence, and even his first-degree murder conviction, than to have him declared innocent.
Williams then attacks key Abu-Jamal supporters — including MOVE, the controversial Philadelphia-based political and back-to-nature group that has been backing Abu-Jamal since his initial trial, and the lawyers from the Trotskyist Partisan Defense Committee (PDC) — who have claimed there exists a grand conspiracy to kill Abu-Jamal, even predating Faulkner’s shooting in 1981, through his time on death row today. Those conspiracy advocates, who have seen the hand of everything from the FBI to Abu-Jamal’s original attorney, Anthony E. Jackson, behind his conviction, fatally weakened his case, Williams argues.
The attorney writes of behind-the-scenes struggles to keep several witnesses promoted by PDC attorneys Rachel Wolkenstein and Jon Piper off the stand during the 1995 rehearing, for instance, because they felt that their testimony was unbelievable and would undermine other more credible witnesses. The witnesses ended up testifying, only to be torn apart under cross-examination by the prosecution attorneys, Williams says.
Later, he claims, Wolkenstein and Piper tried to convince him and Weinglass they had a new witness who could show that Faulkner had been the victim of a police-arranged mob hit, made to look like Abu-Jamal’s doing. When Weinglass and Williams rejected this theory, and did not include it in their habeas corpus appeal, the two PDC lawyers quit the case. Williams says he was “enraged, convinced that bona fide lunacy had set in,” at a meeting where the pair described their “new witness.” Efforts to talk with Wolkenstein about Williams’ account of the defense split were unsuccessful.
Asked why he chose to publish such a controversial book in the midst of Abu-Jamal’s critical habeas appeal, Williams says he was driven by a sense that the case has been moving again in the wrong direction. “This case had and still has the promise and potential to be a powerful referendum on what is wrong with capital punishment and the criminal justice system,” says Williams. “But it hasn’t lived up to that potential because a small fringe element has taken control over the movement, and that has resulted in Mumia’s case being, in many people’s view, an oddity on the fringe of the extreme left wing of our society. In essence it’s been marginalized.”
He says that by laying out the argument for a new trial, and demonstrating what he sees as solid grounds for arguing Abu-Jamal’s innocence of the first-degree murder charge that put him on death row, he hopes “to make the case relevant again, to redirect the debate onto a rational plane.”
But Weinglass, who says he first saw the manuscript of “Executing Justice” on Feb. 20, and who notified Abu-Jamal of it as soon as he had finished reading it two days later, had harsh words for his younger protégé and colleague.
“I don’t think this book does any legal damage to the case,” says Weinglass. “But I do think that it’s done political damage to the unity of the support organization. I don’t agree with Dan’s analysis that Mumia’s case has been marginalized, and I don’t think that it’s the place for a lawyer in a political case to be criticizing and evaluating the value of a support network.” Weinglass adds, “He should have shown the manuscript to me and to Mumia before he sent it to the publisher.”
Others in Abu-Jamal’s support network, which in recent years has come to span the globe, are even more blunt in their criticism of Williams.
In a statement released last Friday, Refuse and Resist, which has helped organize international support for Abu-Jamal, said, “We think it was a serious mistake for Dan Williams to publish such a book, even if written with the best of intentions, without consulting Mumia.”
Pam Africa, a spokeswoman for MOVE, says, “Dan Williams was absolutely wrong in writing that book.” As to the decision by Abu-Jamal to seek to dump not just Williams but his entire legal team, Africa says, “We support what Mumia is doing. If he wants the whole team gone, he’s the one who’s on death row.”
That said, the disruption caused by a change in legal representation at this point, in the midst of what is effectively Abu-Jamal’s last shot at a new trial, could be a serious blow to his efforts to overturn his death-penalty conviction. “I think the book is a jewel,” says noted defense attorney Martin Garbus. “It answers a lot of questions people have had about this case and it has convinced me of Mumia’s innocence. And the firing of Williams and the defense team is unfortunate. But the firing of Len Weinglass, who had nothing to do with the book, is tragic. Weinglass is one of the best lawyers in the country, and by firing him, Mumia is doing himself a terrible disservice.”
Weinglass, for his part, says he remains available to his client. “Of course I’m willing to do anything and everything that’s asked of me for Mumia,” he says. Those who have been pushing for Abu-Jamal’s execution, including the Fraternal Order of Police and the slain officer’s widow, Maureen Faulkner, are already jumping into the fray caused by the publication of Williams’ book. In a statement last week, Faulkner said Abu-Jamal’s decision to fire his attorneys was “making a charade out of the legal process.” She called the move “just another in a long line of transparent, offbeat legal ploys employed by a guilty man who hopes to disrupt and prolong the appeal process.”
“We’re optimistic that this is a sign the deck chairs are being rearranged on the Titanic,” adds Michael A. Smerconish, a Philadelphia attorney who represents an organization called Justice for Police Officer Daniel Faulkner.
It remains possible that Weinglass could stay on as lead counsel. Significantly, critics of Williams in the Free Mumia movement at large, and Abu-Jamal himself, have been silent about Weinglass.
In any event, the decision on how to respond to Abu-Jamal’s request to sack his legal team is up to Judge Yohn, an appointee of former President George Bush who has jurisdiction over the former Black Panther’s case while his habeas corpus petition is being considered.
Said one lawyer familiar with the case, “Judge Yohn has a lot of options. He could let Mumia drop everyone and hire new counsel, or he could just let him drop Williams. If Mumia were to come up with new attorneys who were ready to go into a hearing next week, he’d probably let him drop his old attorneys. But if he says he needs a year to get his new team ready, the judge might say no, you can’t let them go.”
