Experts: Cablevision case unusual
Copyright 2003 Newsday Inc.
Newsday (New York)
June 20, 2003 Friday ALL EDITIONS
The accounting fraud that Cablevision Systems Corp. says it uncovered at AMC Networks is a new twist on the financial scandals that have plagued corporate America during the past two years, accounting experts said yesterday, noting the problems center on fudging of expenses instead of revenue.
On Wall Street, Cablevision's stock took a beating as traders ignored the cable giant's assurances and those of analysts that the bogus accounting at the American Movie Classics unit of Rainbow Media Group was "insignificant" to the company's overall performance.
Cablevision shares fell $1.04 yesterday to close at $21.50 in trading on the New York Stock Exchange. The 4.6 percent drop compared with a 1.2 percent decline in the Dow Jones Industrial average.
Still, cable industry experts and others debated the reasons behind the accounting irregularities that led to the firing of 14 employees, including AMC Networks president Kate McEnroe. The company didn't provide details when it first disclosed the improprieties Wednesday night and a spokesman said yesterday it would "have no further comment on the matter."
The alleged fraud is unusual in that it centers on expenses, which are recorded on a different side of the balance sheet than inventory and revenues, areas where fraud is more commonplace.
In a five-month investigation, Cablevision said it found that employees improperly expensed items, totaling $6.2 million in 2002. The workers "inappropriately accelerated" marketing expenses and fabricated invoices.
In such cases, experts said, employees hypothetically might claim the expense of printing brochures in December, when the work won't be done until March of the next year. This has the effect of lumping costs together in one year so as to improve the next year's bottom line. At AMC, the problems involved expenses during 2000–03.
Mark P. Holtzman, an accounting professor at Hofstra and Seton Hall universities, speculated the employees accelerated expenses in order to meet "internal targets" for the division's budget and to make one year look better than another. "It's like a student changing his report card," he said. "You are managing your results and it does affect the evaluation of your own performance," which potentially could translate into a salary bonus or promotion, depending on the company.
Holtzman and several analysts praised Cablevision's disclosure of the accounting problems, particularly the hiring of outside investigators.
AMC's bogus expenses will have "an insignificant impact, arithmetically, on the valuation of the company," said Thomas W. Eagan, who follows Cablevision for the Fahnestock & Co. brokerage in Manhattan. He also said the $6.2 million in fraudulent expenses equaled only 3.5 percent of Rainbow's total cash flow.
The improprieties aren't expected to doom a proposed deal between Cablevision and businessman Edgar Bronfman Jr. to purchase the film, cable TV, theme park and music assets of troubled Vivendi Universal. A source close to Bronfman told Newsday that "Cablevision's announcement doesn't affect us one way or the other."