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CPAs' Tricks May Burst Market Bubble

  • A financial expert explains how accounting firms collude with unscrupulous companies to profit from the economic bubble.
Exclusive to The SPOTLIGHT
By Bill Parish

Certified public accountants (CPAs) have been entrusted with the responsibility of watching over companies' financial practices. In return the government requires that they conform to certain standards, the most important being that they remain independent of companies they are auditing. If there is a conflict of interest, a CPA must issue a "disclaimer" saying so.

But today, some of the biggest accounting firms are working with multi-million dollar companies to gloss over and, worse, profit from unethical financial practices.

A look at the relationship between one of the "big 5" CPA firms, Price waterhouse Coopers, and some of its clients reveals how the government, ob sessed with maintaining record economic growth, has turned a blind eye, al lowing this to continue and threatening the stability of the U.S. economy.

Pricewaterhouse Coopers au dits some of the largest companies that invest Americans' retirement funds, such as Fi delity, Janus, AXA and Van guard.

The accounting firm not only audits these pension funds, it also audits some of the companies that they are invested in, such as high-tech company Cisco Sys tems and mega-investment firm Gold man Sachs, Cisco's primary investment banking partner.

Collectively, Fidelity, Janus, AXA and Vanguard own more than $50 billion of stock in Cisco Systems.

Even more unusual is that Price waterhouse Coopers, through its consulting division, is a primary distributor and co-marketer of Cisco products and services.

The market value of Cisco stock has reached half a trillion dollars. But the company is supported by only $20 billion in total revenue, representing a mere $2.35 in sales per share. The current share price is $67 and there are 8.5 billion shares of stock outstanding, including options.

Most of the value of Cisco Systems has been manufactured through financial engineering, including issuing a large number of employee stock options instead of paying cash wages.

The company has offloaded its entire tax burden to employees who, along with the retirement system, are being left with inflated shares based upon bogus earnings.

Every time an employee exercises his stock options, even though this expense is not charged to the earnings we see, Cisco gets a tax break. This explains why Cisco Systems no longer pays federal income tax, even though they report billions in profits. The SPOTLIGHT broke this story and later The New York Times reported it on June 13.

Pricewaterhouse does not disclose this key fact to investors.

Another major area with inadequate disclosure involves leasing through Cisco Capital, a wholly-owned subsidiary of Cisco Systems. SEC filings do not include any financial details on Cisco Capital.

Another technique Cisco is aggressively using is an accounting method for mergers called "pooling."

Pooling allows a company to issue stock to pay for mergers without reflecting any related cost as a charge to future earnings. What results is what could be considered "watered stock."

The SEC, under Arthur Levitt Jr. was scheduled to repeal pooling but a furious lobbying effort and money donations to Congress led by Cisco have pushed it back to June 2001.

Cisco Systems CEO John Chambers made $210,000 in political contributions to congressmen, who soon after wrote a letter to the Financial Accounting Stan dards Boards (FASB), a government regulatory body, criticizing the proposed re peal of pooling.

A Cisco spokesman said the timing was a coincidence.

Pricewaterhouse Coopers is perhaps best known for also being the auditor of the infamous Bank of Credit and Commerce International (BCCI) for four years before it failed.

BCCI was supposedly worth $60 billion and operating in 60 countries before being rendered entirely worthless.

Another prominent client is Micro strategy, a leading technology company whose stock plunged 50 percent when the SEC required that its financial statements be restated.

Pricewaterhouse Coopers also co-marketed various Microstrategy products.

In January 1999 the SEC brought charges against Pricewaterhouse Co opers for widespread auditor independence violations with respect to firm partners directly owning stock in companies they audit.

This problem and others resulted in a special Independence Standards Board being appointed. Unfortunately, six of the nine board members are from large CPA firms, including Pricewaterhouse Coop ers. The only true investor advocate on the board is John Bogle of the Van guard Group.

The American Institute of CPAs, of which Pricewaterhouse Coopers is a powerful member, is now lobbying Congress to overrule stricter SEC independence guidelines in addition to permitting the continued use of the pooling method for acquisitions.

In the 1930s President Franklin Delano Roosevelt was so disgusted with similar industry practices after the collapse of the financial system that he seriously considered requiring that all auditors be government employees. Instead, the SEC was created.

The SEC's efforts are under assault from the very same accounting community it is supposed to regulate as Cisco Sys tems aggressively lobbies Congress to undermine and overrule it.

It's doubtful a Republican or Democrat administration will try to seek reform. George W. Bush and Joe Lieberman strongly advocate pooling and have consistently taken steps to prevent needed reforms to our financial system.

If you have your financial future invested with Fidelity, Janus, Vanguard or AXA you might send them a letter questioning their choice of auditors.

You might also consider posting comments on your favorite Internet forum discussion groups.

I've sent a letter to Pricewaterhouse Coopers, copying Cisco Systems and the SEC, requesting that they issue a "disclaimer" audit opinion for the Cisco Sys tems audit for the year ending July 31 and cite their inability to express such an opinion due to a lack of independence.

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Bill Parish, a certified public accountant, is a registered investment advisor at his own firm. Parish has worked with Arthur Anderson, as the chief financial officer of a large regional financial institution and as a senior analyst for a large bank. Parish has an MBA with an undergraduate degree in accounting and has taught finance at leading universities in the United States, Central and South America.