Accounting Worried Global Crossing Exec
A finance executive at ailing Global Crossing Ltd. warned the firm’s top attorney in August that the company’s financial condition was being enhanced with misleading accounting techniques, according to a letter obtained by the Los Angeles Times.
The five-page letter, written by Roy Olofson, former vice president of finance, contains a detailed analysis of what he called deceptive accounting practices involving Global Crossing, its sister firm Asia Global Crossing and its auditor, Andersen. These included inflated revenue and cash-flow figures, numbers that may have helped convince investors and analysts that Global Crossing was healthier than it actually was, Olofson wrote.
The contents of the letter came to light one day after Global Crossing, a Beverly Hills telecommunications company, filed for Chapter 11 bankruptcy protection, listing debts of $12.3 billion and assets of $22.4 billion. It is the fifth-largest bankruptcy case in U.S. history.
The company vehemently denied Olofson’s accusations.
“This is a situation we are very familiar with, has thoroughly been investigated both internally and externally, and is without merit,” the company said in a statement. “Mr. Olofson is a former employee who is trying to draw parallels to the Enron situation for his own personal gain. The company believes that Mr. Olofson’s threat to take this issue public through the filing of a lawsuit unless he was paid a substantial amount of money speaks for itself.” A spokesman would not elaborate.
Andersen spokesman David Tabolt said the accounting firm doesn’t yet have enough information to comment on the letter. “We just found out about this [late Tuesday], and we are looking into it,” he said.
Olofson couldn’t be reached, but his attorney, Brian C. Lysaght of O’Neill Lysaght & Sun in Santa Monica, confirmed the existence of the letter obtained by The Times. However, he declined to comment on its contents.
Global Crossing general counsel Jim Gorton left the company within days of receiving Olofson’s letter. He could not be reached Tuesday, but Casey Cogut, another attorney working for Global Crossing, said Gorton’s departure “had nothing to do with the letter.” Olofson was laid off three months later.
In the letter, Olofson asked Gorton to investigate the company’s accounting practices and urged him not to involve Global Chief Financial Officer Dan Cohrs or Joe Perrone, Olofson’s boss and a recent recruit from the now-beleaguered Andersen accounting firm. Perrone had supervised Global Crossing’s initial public stock offering and then served as the company’s lead auditor at Andersen.
Still, Olofson’s letter outlines issues similar to those at the heart of the current scandal at Enron, the Texas energy firm that collapsed amid allegations that company executives used, and Andersen auditors blessed, misleading accounting to hide the firm’s mounting losses. Andersen is accused of overlooking the accounting sleight of hand to maintain good relations with Enron, which was a major customer of Andersen’s consulting business.
In addition, Enron executives allegedly sold millions of dollars in company shares before the accounting troubles were uncovered.
In Global Crossing’s case, some industry analysts were already wary of the company’s accounting methods--which are standard in the telecommunications industry--but most ordinary investors were not.
Olofson, of La Canada Flintridge, is one of the many lesser-known executives who have flowed through Global Crossing in recent years. In 1996 and 1997, he was the chief financial officer at PIA Merchandising Services Inc., an Irvine company that specialized in tracking the distribution and marketing of branded goods sold in grocery stores. Before that, he spent more than 13 years at Santa Fe Springs-based Fedco, where he eventually became chief executive.
Previous jobs included stints as treasurer at retailing conglomerate Carter Hawley Hale Stores, and the accounting firm Price Waterhouse.
His Global Crossing letter takes aim at a little-known accounting policy embraced by Global Crossing and other major communications network operators known as “indefeasible rights of use,” or IRUs. These instruments are used to sell bandwidth on Global Crossing’s fiber-optic network typically for 25 years.
Global Crossing and its competitors frequently bought space on one another’s networks in areas not covered by their own systems to offer corporate customers a more complete data system.
But analysts have grown wary of the excessive use of IRUs and the way Global Crossing and others were registering their sales on financial reports. In some cases, Global Crossing would buy an IRU and book the price as a capital expense, which would spread the expense over a number of future years. It would then resell that capacity and book the proceeds as revenue, leaving some investors to see the increase in revenue, but not the expense, said Susan Kalla, a telecommunications analyst at Friedman, Billings Ramsey.
“That’s perfectly legal to do, but a better way to do it so that investors could better understand what was going on, would have been to book the IRU as an expense and then register the revenue against the expense,” said Kalla, who has been so bearish on the industry that she gained the nickname “Dr. Doom.”
The way Global Crossing, Qwest Communications International, 360networks and others handled the IRUs “might have made it look like the revenue was being generated from the capacity that the [respective companies] put in, but it was capacity that they bought and then resold to another carrier,” Kalla said. “They were selling stuff to each other. . . . I would sell you an IRU, and then you would sell it back to me.”
Most industry analysts ultimately became somewhat familiar with the IRU accounting technique, but ordinary investors--to their detriment--were focusing on the income and revenue figures, and probably didn’t notice the IRU purchase expenses listed elsewhere in the financial statements, Kalla said.
Olofson’s letter contends that the IRU accounting practice was a sly way for Global Crossing and other young telecommunications companies to report better results.
The letter, dated Aug. 6, 2001, makes no mention of any criminal behavior, such as document shredding or insider trading.
Federal regulatory filings show that Gary Winnick, the influential chairman and founder of Global Crossing, sold no shares after May 23 of that year, 2 1/2 months before Olofson submitted his letter.
It is unclear whether Winnick knew about Olofson’s letter or its accusations, but two outside attorneys working for the company said they had reviewed the letter several months ago.
Winnick and most other Global Crossing executives sold large amounts of shares over time, but only a few did so after Olofson wrote his letter.
