Accounting woes sink stocks

January 30, 2002: 4:46 p.m. ET

Market pounds companies with any hint of accounting questions.

NEW YORK (CNN/Money) - Stung by the fallout from Enron's questionable accounting practices, investors are taking no chances these days when it comes to dumping stocks of companies with questionable accounting practices.

Companies ranging from credit-card firm CompuCredit to high-profile conglomerate Tyco International have seen their shares plummet this week on worries sparked by energy company Enron's mess. Enron's bankruptcy, which followed its restatement of earnings back to 1997, has been accompanied by allegations of improper accounting methods, especially concerning off-balance-sheet businesses, conflicts of interest for its top managers, and failure to act on notification of the accounting problems.

James Awad, chairman of Awad Asset Management in New York, says investors have a "shoot first" mentality right now about accounting problems. Investors are rushing to sell shares of any company touched by accounting questions rather than waiting for answers, he notes. Some companies may have overstepped clear limits, he says, but others may be unjustly accused.

The Williams Cos. (WMB: down $0.78 to $18.00, Research, Estimates) believes it is among those unjustly accused. Its shares fell sharply Tuesday after the energy company delayed its full-year earnings report until it knows whether or not it will have to cover $2.2 billion of debt it guaranteed for Williams Communications, which was spun off in 2001.

In the spinoff, parent Williams Cos. essentially guaranteed the $2.2 billion of debt for the communications company, agreeing to pay it back if the communications company didn't do so. To further assure investors, Williams also agreed to pay back the $2.2 billion if its own credit rating fell below investment-grade.

But when the Enron situation blew up, other companies in the same business were told by the credit-rating agencies that they would have to upgrade their balance sheets to retain an investment-grade rating. Williams has almost completed its plan for doing so, having raised $1 billion in equity and reduced 2002 capital spending by $1 billion, the spokesman said. It's in the process of completing the last step of selling between $250 million and $750 million in non-core assets, he said.

On Wednesday, Williams issued a press release calling the market's response an overreaction, saying the company has accounted for and disclosed the facts of the communications-company guarantee since its inception. A Williams Cos. spokesman told CNN/Money the that because the company has communicated about this situation all along, it might not have communicated it as well as it could have in Tuesday's announcement, and that better communication might have prevented the stock market's dramatic fashion.

The company's shares stabilized somewhat on Wednesday, but still closed down 13 percent after losing 22 percent on Tuesday.

CompuCredit (CCRT: down $3.63 to $5.22, Research, Estimates) shares also plunged Wednesday. The Atlanta-based company reported only preliminary fourth-quarter results late Tuesday because it said the total amount of a possible accounting adjustment to earnings can't be precisely estimated.

The possible adjustment is related to a disagreement between the company and its auditors over accounting for the sale of an asset. CompuCredit wants to spread out the cost of the sale of some of its interest in securitizations over a number of years, but its auditors think it should be recorded immediately as a loss upon the sale of the interest. The auditors also are considering re-evaluating CompuCredit's remaining interests in the securitizations.

Shares of Tyco (TYC: up $1.10 to $34.75, Research, Estimates), which is headquartered in Bermuda, fell sharply Wednesday for a second day after the company revealed it had compensated one of its directors for arranging the acquisition of a company in which he held a financial interest.

On Wednesday, rating agency Standard & Poor's said the director's payment doesn't itself pose serious credit-quality concerns, and that questions about the company's accounting practices have been answered to its satisfaction. The credit-quality questions appear to have caused the erosion in Tyco's stock price and widening spreads on its bonds, and if these market conditions are prolonged, it could hurt the company's ability to complete its plan to split up into four independent companies, S&P said. But even if that plan were to fail, credit quality wouldn't be impaired, it said.

Also Wednesday, Tyco said CEO L. Dennis Kozlowski, reaffirming his belief that the shares are undervalued and his complete confidence in their long-term value, said he would purchase 500,000 shares with his own funds, as would CFO Mark Swartz.

Shares of Cendant (CD: down $0.47 to $16.05, Research, Estimates) (GE: up $0.42 to $36.88, Research, Estimates), which owns the Avis rental car business, have been tarred in the past two days because the company has off-balance-sheet entities and suffered a major accounting scandal in its past. But no information has emerged about any new problems, and the company said Tuesday it was unaware of any negative media reports that would affect its stock.

Ireland-based Elan Corp.'s (ELN: down $5.95 to $29.25, Research, Estimates) American depositary receipts (ADRs) fell after a Wednesday Wall Street Journal article raised questions about the pharmaceutical company's practices of accounting for joint ventures, although the company disputes the story. Max Gershenoff, an Elan Corp. spokesman, said that the company has always used Generally Accepted Accounting Principles (GAAP) in the United States and Ireland, adding that Elan has a very strong cash position and that the joint venture strategy has resulted in a pipeline of products for the company.

Shares of Anadarko Petroleum Corp. (APC: down $0.51 to $46.89, Research, Estimates) tumbled Wednesday after the oil services company late Tuesday restated and lowered its third-quarter 2001 results, saying it had incorrectly calculated an impairment charge for low natural gas and oil prices. It characterized the error as an isolated incident.

PNC Financial Services Group (PNC: down $0.37 to $55.71, Research, Estimates) of Pittsburgh lost nine percent of its market value Tuesday and were down again Wednesday after it restated and lowered its 2001 results on a Federal Reserve order to consolidate preferred interests in three subsidiaries of an unidentified major insurer. The move contravenes guidance PNC says it received from its auditors.