FEI.

CONFERENCES

FEI/AICPA -- Quality of Earnings Program

FEI joined with the American Institute of Certified Public Accountants to host an information-packed one-day conference in New York on April 26. The focus: benchmarking the quality of earnings statements, a major topic at a time when analysts and investors have taken issue with many earnings announcements.

The conference kicked off with an address by Lynn Turner, chief accountant for the Securities and Exchange Commission, who argued that a rising number of earnings warnings in recent quarters actually argue that investors are gaining increased transparency. Turner also said he thinks corporate controllers are experiencing fewer pressures to "make the numbers" as audit committees become more knowledge able and aggressive. Still, CFOs need "spine" to stand up to CEOs when they sense there is an attempt to manage earnings, he said.

Turner maintained that many earnings statements need to be cleaned up and reconciled to GAAP, and that too many corporate releases highlight "earnings before the bad stuff."

He also argued that standard-set ting processes need to be made simpler and directed more at "economic reality," which might lower the cost of tracking systems. The SEC, he added, would like to see the analyst community set up guidelines for stock recommendations, which he suggested are consistently higher than company results would suggest.

A panel discussion then followed on evaluating earnings quality, featuring three Wall Street analysts and a research consultant. Jane Adams, a former SEC accountant who now works for Credit Suisse First Boston, reviewed her perceptions of the real and hypothetical impact of complying with FAS 133, the controversial standard on valuing derivatives. Adams complained that there is no consistency of treatment, with companies sometimes scattering derivative accounting in four or five places on their balance sheets.

Patricia McConnell of Bear, Stearns & Co. largely defended the practices of analysts, whom she said are smarter and better-trained than ever before. "I think we're closer to representational faithfulness," she said, noting tremendous advances in modeling financial performance as analysts work to disaggregate information and determine future cash flows more precisely.

Gabrielle Napolitano, a managing director with Goldman, Sachs & Co., praised the FASB decision to put a business model project on its agenda, saying the board "is attempting to identify qualitative business drivers." She reviewed a number of other FASB rules of recent years, calling FAS 106 and 112 -- dealing with postretirement health care and benefits -- "watershed events" that revealed information previously largely hidden.

The fourth panelist, Howard Schilit, president of the Center for Financial Research and Analysis, talked about financial "shenanigans," a term he popularized in a book a number of years ago. Schilit contended that both financial reporting and analysis need improvement, and that auditing "needs considerable improvement."

Not all shenanigans are criminal, Schilit said, using the example of a company that changed its goodwill amortization period from 20 years to 30 years to improve its results -- a move allowed by accounting rules. "The goal ought not to be to intentionally distort," he said. He offered a detailed breakdown of "Schilit's Seven Shenanigans," five of which involve overstating profits in the current year and two of which reduce actual profits. Revenue recognition issues figure importantly on that list, he noted.

In a following session, focusing on the corporate side, Citigroup Controller Roger Trupin argued that "most people are trying to do the right thing" in reporting results. Controls are generally sound, and there is a "proper tension" between financial and business operations. But Trupin contended that the "external environment" is creating major challenges for companies when reporting, given higher scrutiny and a high volume of accounting changes in recent years. In fact, accounting rules are approaching IRS regulations in complexity, he said.

Trupin also argued that disclosure rules have added a layer of cost to company operations because the data required is "information that management doesn't generate to run its business." He added that the pressure to mark assets to market "is a very disruptive force," and that such a revaluation of companies' balance sheets would be impossible without very sophisticated tools that don't now exist.

During an afternoon panel, Katherine Schipper, a professor at Duke University, aggressively questioned a group of accounting specialists about their view of accounting standards, goals, priorities and challenges. G. Michael Crooch, an FASB board member, maintained that the keys to quality reporting are: 1) reliability, 2) relevance, 3) timeliness, and 4) neutrality. Neutrality, he explained, means not bringing about a biased or directed result. He added that the conversion to international accounting standards will be "very difficult," and that the complexity we see in this country may not disappear in favor of a more general global standard.

Jeannot Blanchet, a managing director with Andersen, said he believes companies spend too much time collecting and spreading financial information and not enough time measuring the components. He added that the complexity of accounting rules stems in part from the climate of litigiousness in the U.S., which has spurred attorneys to seek specific wording to protect companies from liability.

The third panelist, Ernst & Young partner Norman Strauss, argued that volatility need not always be recognized in an earnings statement if that doesn't generate meaningful information about financial statement accuracy. He also questioned amortization practices, saying amortization "generally fails to provide useful information for the preparer or the user." However, he said he sees the FASB's move to eliminate amortization as logistically difficult and likely to create implementation problems for companies.

Virtual Chapter Meeting

In a highly successful premiere effort, FEI held a "virtual chapter meeting" on April 24. The Web-casted event featured Harvard Business School Prof. Rosabeth Moss Kanter, who spoke for 40 minutes on change management, the subject of her recent book, Evolve: Succeeding in the Digital Culture of Tomorrow.

Kanter actually spoke that evening from her home in Cambridge, Mass., with FEI contracting for the technology that sent the signal out through the Internet. Thirteen chapters around the country -- both large and small -- took part in the meeting, said Andrej Suskavcevic, FEI's director of chapter relations. Kanter's talk was followed by a question-and-answer session moderated by FEI President and CEO Philip B. Livingston.

Chapters needed to have highspeed Internet access and a large projection screen to view the presentation, and many elected to hold the meeting at a hotel or university setting, Suskavcevic noted. "The picture and the audio were great," he said, and initial responses from the participating chapters were very enthusiastic.

Suskavcevic said the next "virtual" meetings have been tentatively slated for October 2001 and March 2002 -- and that chapters have been asked to schedule them as regular meetings and not special, added meetings for that month.

ISSUES/ADVOCACY

Press Release Guidance

In a joint release on April 26, in conjunction with the FEI/AICPA conference, FEI joined with the National Investor Relations Institute to issue best practices guidelines for company-issued earnings press releases -- in particular, those dealing with "pro forma" numbers. FEI and NIRI have concluded that pro forma results may be more analytically useful than conventional results in some cases, but should always be accompanied by clearly described reconciliation to GAAP.

"Given today's complex, diversified business models, many companies, analysts and investors are appropriately seeking to make the results of operations more accessible and relevant," noted FEI President and CEO Philip B. Livingston. "Pro forma results can meet this objective. On the other hand, GAAP serves as a critical framework for financial infor mation, and we urge companies to be very clear in disclosing the path from pro forma to GAAP results." Livingston and Philip D. Ameen, vice president and comptroller of General Electric Co. and chairman of FEI's Committee on Corporate Reporting, fielded media questions on the release during the conference.

The guidelines, which aim to promote consistency among companies for presentation and analysis of financial results, include advice on a number of areas: scope, timing, content and consistency.

PEOPLE

A number of new employees have recently joined FEI:

Marla Markowitz Bace joined as executive vice president and chief operating officer of FEI's Research Foundation. Her experience includes financial, project management and brand management positions with Nabisco Inc., and financial positions with Prudential Investments, J.P. Morgan & Co. and Ernst & Young LLP.

Janice McDonald joined as office manager for the Research Foundation. She has administrative experience with Bear, Stearns & Co., Olympia & York and Goldman, Sachs & Co.

Ray Millner joined as senior vice president of operations, with functional responsibility for most of the Morristown administrative activities as well as FE magazine. His back ground includes experience as manager of financial analysis at Philips Electronics, VPF for a subsidiary of Masco and division controller for Thomas Lighting.

George Moriarty joined FEI's Research Foundation team as senior editor. He was formerly with Thom son Financial as editor-in-chief for Private Equity News and manager of four financial news publications.

Jenny Ortiz joined as a retention associate for membership renewal follow-up and service. She has customer service, database and account maintenance experience.

Bob Shepler joined FEI's Washington, D.C., office as government relations manager. Shepler's back ground includes experience on Capitol Hill working on the Senate Special Committee on Aging and the personal staffs of Sens. Charles Grassley (R-Iowa) and Robert Smith (R-N.H.)

Frederick Uy joined the Internet Services Department as a Web developer. He has experience working with Digerati Corporation.