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Costs Count When the Feds Say So

Focus AccountingLast month the CFO of Outback Steakhouse surprised listeners on the restaurant chain?s regularly scheduled earnings conference call. He announced his retirement from the Des Moines, Iowa-based company and, according to an AP report, blamed the ?recent lunacy over lease accounting? that has forced Outback and many other public companies to revise their financial statements.
He?s not the only one with a headache; recently issued Securities and Exchange Commission guidance forced restatements by more than 260 companies?some of which are in New Jersey. The new policy is also seen by some as a threat to the independence of the Financial Accounting Standards Board (FASB) that has traditionally set the rules for the accounting industry. Threat or not, it?s forcing some companies to recognize rent and related expenses in ways that can strip the sheen from their bottom line.
The revised results have been affecting previous years and causing dramatic changes. In March Clifton?s Linens ?n Things announced it had restated results for the first quarter of 2004, swinging from a reported profit of $30,000 to a loss of $1.1 million. At about the same time, Berlin-based A.C. Moore Arts & Crafts announced it had reduced its previously reported profits for the quarter ended September 30, 2004, from $986,000 to $865,000. The restatements affected earnings for additional periods as well.
Unlike highly publicized revenue-recognition scandals at firms like Cendant and Lucent, the new situation doesn?t appear to involve allegations of impropriety. Alan Markowitz, an audit partner with Roseland-based J.H. Cohn, says the SEC was simply trying to apply some consistency to a broadly interpreted accounting rule.
?Many accounting rules are not specific, and leave some degree of implementation open for companies to determine on an individual basis,? he says. ?It looks like the SEC wanted to bring some consistency to the treatment.?
But there may also be political overtones to the SEC?s action, says David Vance, an assistant professor of accounting at the Rutgers University School of Business-Camden. ?Traditionally, the SEC defers to FASB as the standard-setter for the accounting industry,? says Vance. ?But ever since Enron and other corporate scandals, politicians and others have asked how well FASB [which is financially supported by the private sector] really polices the industry.?
Lillian Ceynowa doesn?t see it that way. Ceynowa, the director of the Center for Public Company Audit Firms at the American Institute of Certified Public Accountants, says, ?The SEC is not establishing new rules, it?s just clarifying existing ones.?
Markowitz agrees, saying that companies and regulators alike are more sensitive to possible errors these days. ?Partly as a result of the Sarbanes-Oxley Act of 2002 [which, among other requirements, commits top managers to certify they have reviewed the company?s quarterly and annual reports] managers and others are more concerned about lawsuits,? he says.
Even in this atmosphere the new policy can be a big change. ?Historically,? Markowitz says, many companies recognized rent-related expenses as of the date they actually opened a store instead of the date at which they took possession, which could predate the opening by a few months.? Now, he says, they may have to recognize the costs earlier.
And while the affect on profits of recognizing a few months of rent and outfitting costs from one store are minor, they can add up quickly for national retailers with hundreds of outlets.
Vance sees a direct link from earlier SEC-FASB scuffles to the latest round. He says the first significant skirmish, in the wake of the dot-com collapse, focused on stock options that cash-poor high-tech companies used in lieu of big paychecks to attract talent. The options generally give a holder the right to buy stock at a locked-in price for a specific period, regardless of any changes in the share price. The bone of contention was that these companies didn?t report the stock options as an expense, while established firms paying big salaries had to recognize that cost in their filings. The SEC weighed in on the side of recognizing some expense for the options and, amid rumors of a possible government takeover, FASB gave in.
?The second major erosion in FASB?s authority was Sarbanes-Oxley and the establishment of the Public Company Accounting Oversight Board, which oversees the auditors of public companies,? says Vance.
Vance doesn?t see the FASB rolling over and playing dead; he expects the board to ?reassert its authority.? ?FASB will probably defend itself by strengthening accounting rules in different areas,? he says. ?One area might involve guidelines for insurance companies that have engaged in suspicious reinsurance and other deals.?
One such company is New York City?s American International Group. On May 1 the firm?which has been under investigation by New York Attorney General Eliot Spitzer and other government regulators?announced it would recognize $2.7 billion in adjustments and other charges ?for improper or inappropriate transactions or entries.?
Meanwhile, by April 29 some 268 companies had restated their financials or announced they were in the process of reviewing their records for lease activity, according to the Analyst?s Accounting Observer, a Baltimore research service.
As Vance puts it, ?Ideally, companies would have the internal control processes to either reduce or eliminate the number of misstatements or to discover them faster. Failing that, one would hope that outside auditors focus more attention on these areas.?
Until then, companies opening new stores may find that their first visitors are the feds.
email mdaks@njbiz.com

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