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    Highlights for week ending July 13, 2002
  • TheStreet.com: IBM's Cash Flow is Weaker Than It Looks. Excerpt: " Just as a baseball team's batting average doesn't reveal the team's true quality, earnings, as reported in an income statement, often say little about the actual health of a company. As a result, smart investors like to have an alternative up their sleeve. Free cash flow is one measure that strips out a lot of the earnings noise and focuses more closely on actual greenbacks. It's a particularly useful tool for IBM, whose earnings get a boost from accounting constructs such as pension fund 'income.'"

  • Fortune: IBM Finally Catches Tech's Virus. Excerpts: "While Gerstner was known for clever accounting, such as using share buybacks and pension return calculations to achieve methodical earnings growth, Wall Street now frowns on anything that smacks of accounting manipulation. Palmisano can reach into the Gerstner earnings toolbox to some degree, but he'll also need to find new growth."

  • Citizens for Tax Justice: Surge in Corporate Tax Welfare Drives Corporate Tax Payments Down to Near Record Low. Excerpts: "A startling surge in corporate tax welfare is expected to drive corporate income taxes over the next two years down to only 1.3 percent of the gross domestic product. That will be the lowest level since the early 1980s—and the second lowest level in at least six decades. Driven in part by the new corporate tax breaks just enacted in the so-called “stimulus” bill, the total cost to ordinary American taxpayers of corporate tax welfare will exceed $170 billion annually in each of the next two years." ... "IBM reported $5.7 billion in U.S. profits in 2000, but paid only 3.4 percent of that in federal income taxes. In 1997, IBM reported $3.1 billion in U.S. profits, and instead of paying taxes, got an outright tax rebate. Over the past five years, IBM enjoyed a total of $4.7 billion in corporate tax welfare."


  • CBS MarketWatch: Domini targets AT&T pension. Social investor critical of five-year old cash balance plan. Excerpt: "AT&T converted its defined benefit pension plan to a cash balance plan in 1997 -- a move that could potentially reduce the pensions of 30,000 AT&T employees, according to Domini. The social investor said that it's not challenging AT&T's decision to convert to a cash balance plan, but argued that affected employees should have been given a choice between the old defined benefit plan and the new plan."

  • AFL-CIO Resources for Workers Facing Layoffs. Excerpt: "Cooked books and obscene executive pay and perks. Pink slips and lost health insurance and retirement security. Thousands of workers are suffering today because of corrupt corporate practices that enrich the few at the expense of the many. Thousands more are worried they could be next. This website provides resources for surviving unemployment, meeting working family challenges, learning what went wrong, protecting your retirement security, getting active—and having a little fun meanwhile."

Articles about corporate malfeasance:

  • Business Week: Why Corporate Crooks Are Tough to Nail. Excerpt: "What's more, many of the abuses that have enraged the public are entirely legal. Companies can file misleading accounting statements that are in complete compliance with generally accepted accounting principles (GAAP). They can boost their income, for example, simply by assuming that their pension plan investments will earn a higher rate of return in the future. Executives are also allowed to enjoy outrageous incomes and baronial perks without breaking any laws at all--so long as the board approves. And because so many of the laws governing corporate conduct are weak, there's no way criminal or civil prosecution can ever be a complete substitute for regulatory reform--no matter how aggressive the White House promises to be." ... " Big companies have lots of lawyers, and these lawyers specialize in creating exactly the type of paper trail that will exonerate top execs. Aggressive actions are routinely fortified with sanitizing formalities: file memos that justify iffy decisions, board approvals, and blessings from outside lawyers and accountants. Even if they helped nurture a corrupt corporate culture, CEOs and CFOs can often plausibly claim that they knew nothing about wrongdoing three or four levels down the hierarchy. All of these factors help to create the type of reasonable doubt that kills criminal prosecutions."
    • Linda Guyer comments on the phrase "many of the abuses that have enraged the public are entirely legal. Excerpt: "Our major media sources have been merging into a few conglomerates that are owned by big corporations. YOU AND I are being fed a relentless message of "TINA" - "THERE IS NO ALTERNATIVE". The message is that the free market is so great for everyone that corporations must be allowed to do anything they want -- in spite of the fact that corporations are only responsible for one thing, and that is profit. They are NOT responsible for employee welfare community good, pollution or environmental concerns, legality of their financial records, or the general fairness or morality of anything. I am not against a free market. The fact is, it is not really free. Corporations are loosening the laws and asking for government funding and favors, to further their profit goals at the expense of "the little guy". Are you appalled about welfare going to lazy bums? No, I don't mean the inner city poor or the rural poor, I mean corporations. More dollars go to corporate welfare than go to people. Ralph Nader presented that fact to Congress several years ago. And suddenly because of Enron a few people are finally waking up to corporate abuses. But Business Week is right, not much of substance will really happen."

  • New York Times editorial by Senator John McCain (Republican, Arizona): The Free Market Needs New Rules. Excerpt: "The need for government action and oversight is clear. Corporations fabricated revenues, disguised expenses and established off-balance-sheet partnerships to mask liabilities and inflate profits. Executives maximized their compensation with stock option plans that burdened their companies with huge costs hidden from investors. Venerable accounting firms, having looked the other way as companies cooked the books, shredded documents to hide their misdeeds. Although American tax policy encouraged them to do so, corporations that move their legal headquarters offshore to avoid taxes appear conspicuously ungrateful to the country whose young men and women are risking their lives today to defend them." ... " Stock options, while a legitimate and valuable form of employee compensation, must be identified as an operating expense in a public company's financial reports. Top executives should be precluded from selling their own holdings of company stock while serving in that company. Executives should be allowed to exercise their options, but their net gain after tax should be held in company stock until 90 days after they leave the company." If link is broken, view Adobe Acrobat version [PDF--35 KB].

  • Molly Ivins editorial: And they called Willie slick. Oil boys spin themselves into hypocritical frenzy. Excerpts: "As it happens, Bill Clinton did not appoint Harvey Pitt chairman of the Securities and Exchange Commission, a position from whence Pitt has achieved the almost-unimaginable distinction of getting himself criticized by The Wall Street Journal for being too close to business. Instead, Clinton appointed Arthur Levitt chairman of the SEC, and everyone from Wall Street to Main Street is now wandering around muttering, "If we'd just listened to Arthur Levitt, we wouldn't be in this trouble." Levitt's strenuous efforts to save the system from itself were blocked by the business lobby." ... " Perhaps I am too cynical, but I believe there is a separate class of people in this country called Too Rich to Go to Prison. With the peerless John Ashcroft at the helm of the Justice Department, I don't think any of the now-infamous CEOs need to lose sleep over the prospect. It's not exactly like Bobby Kennedy going after Jimmy Hoffa."
    • American Accounting Association: "The Numbers Game". Remarks by Chairman Arthur Levitt, Securities and Exchange Commission, delivered at the NYU Center for Law and Business, New York, NY, September 28, 1998. (Nearly four years ago). Excerpt: "Increasingly, I have become concerned 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."

  • New York Times: How Stock Options Lead to Scandal. Excerpts: "Options, which are not counted as an expense and thus inflate earnings, bring with them a powerful incentive to cheat. They hold out the promise of wealth beyond imagining. All it takes is a set of books good enough to send a stock price soaring, if only for a while. If real earnings are not there, they can be manufactured — for long enough, in any case, for executives to cash out. This, in essence, is what happened at Enron, WorldCom, Xerox — indeed, at quite a long list of companies. That list is bound to grow, judging by the findings of a study I published with two colleagues last year."

  • New York Times editorial by Paul Krugman: The Insider Game. The current crisis in American capitalism isn't just about the specific details — about tricky accounting, stock options, loans to executives, and so on. It's about the way the game has been rigged on behalf of insiders. And the Bush administration is full of such insiders. That's why President Bush cannot get away with merely rhetorical opposition to executive wrongdoers. To give the most extreme example (so far), how can we take his moralizing seriously when Thomas White — whose division of Enron generated $500 million in phony profits, and who sold $12 million in stock just before the company collapsed — is still secretary of the Army? ... And he still opposes both reforms that would reduce the incentives for corporate scams, such as requiring companies to count executive stock options against profits, and reforms that would make it harder to carry out such scams, such as not allowing accountants to take consulting fees from the same firms they audit." If link is broken, view Adobe Acrobat version [PDF--31 KB].

  • New York Times editorial by Paul Krugman: Succeeding in Business. Excerpts: "Unfortunately, the administration has so far gotten the press to focus on the least important question about Mr. Bush's business dealings: his failure to obey the law by promptly reporting his insider stock sales. It's true that Mr. Bush's story about that failure has suddenly changed, from "the dog ate my homework" to "my lawyer ate my homework — four times." But the administration hopes that a narrow focus on the reporting lapses will divert attention from the larger point: Mr. Bush profited personally from aggressive accounting identical to the recent scams that have shocked the nation." If link is broken, view Adobe Acrobat version [PDF-- 16KB].
"The test of our progress is not whether we add more to the abundance of those who have too much; it is whether we provide enough for those who have too little." — Franklin D. Roosevelt
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