by Stephen Frey
“You don’t know that.”
“You like blondes with big bosoms,” she said pushing her chest out. “Not little brunettes like me who barely fill a B cup.”
“How do you know what I like?”
“You told me once.”
“I did not.”
“You just don’t remember.”
“Maybe I was trying to make you jealous, Jo.”
“Don’t do this to me, Conner,” she pleaded, waving her hands. “I can’t take it.”
“Okay, okay.” He paused. “So what’s the thought of the day?”
Jackie put a finger to her lips and looked at the ceiling. “When you lose, don’t lose the lesson.”
He’d heard that one before, but he liked it. “Good one.”
“Would you expect anything less?” She gazed at him intently for a few moments, then looked down. “So, why did you need to see me?” she asked quietly. “What questions do you have?”
Conner rubbed his eyes. He’d spent last night at Gavin’s sprawling Upper East Side apartment. He felt safe there, but didn’t sleep well because of the images still haunting him. The intruder falling, arms and legs flailing. The blonde in the dark blue baseball cap. Art Meeks, notepad in hand. And the most vivid of all—Liz’s neck and chest covered with blood.
And he was haunted by what the intruder had said. That Liz was just a pawn, and all those words implied. And that he was a federal agent.
Conner hadn’t said anything to Gavin about what had happened—nothing about his second encounter with the intruder—and he felt guilty. He was even more of a target now. And so was everyone around him.
He finally fell asleep around three thirty, but Gavin’s sharp knock on the bedroom door woke him an hour later. They had to be in New Jersey at eight for the Pharmaco presentation, and Gavin wanted to run through the deck one more time before they climbed in the limousine and headed into the Lincoln Tunnel. Gavin never read anything in a car. It made him sick.
The presentation to Pharmaco’s board of directors had lasted three hours, and Gavin had been magnificent. Leading the CEO and the board members through a maze of possible outcomes of the European conglomerate’s offer. And the effects and intricacies of each. The likelihood of shareholder suits if the board accepted the offer immediately without at leastattempting to negotiate a higher price. The difficulty of identifying a white knight on short notice should the European firm launch a hostile tender offer if they were rebuffed. The possibility that other domestic drug companies would appear on the scene. The need for the board to entrench senior management by quickly approving bailout packages—golden parachutes and massive retirement benefits—because acquirers usually cut costs at a newly acquired company by firing highly paid executives if packages hadn’t been adopted. Gavin’s willingness to contact a close friend and partner at one of Wall Street’s most prominent leveraged buyout firms to determine if a going-private transaction could be arranged.
Gavin’s advice was delivered free of charge because fledgling investment banking firms like Phenix, even ones with Gavin Smith as their founding partner, still had to give away services to hook big clients. When the presentation ended, the CEO politely thanked Gavin for the information, but gave no indication that Phenix would be selected over Harper Manning to advise the company. Gavin hadn’t said a word during the ride back into New York. He’d simply stared out the window, watching the rural scenery turn urban.
“I need you to explain how a public company can manipulate its earnings,” Conner explained. Jackie could smell fraud a mile away, and dissect financial statements like a surgeon. Her contact list was broad and deep, too: investment bankers, commercial bankers, lawyers, other accountants, corporate executives, and regulatory people at both the federal and state level. She was the perfect person to ask about all this. “How it can make the financial statements look better than they are without raising any suspicions, at least not in the short term.”
She nodded. “You want to know how a company like Enron, with billions of dollars in revenues, can be worth eighty bucks a share one day and declare bankruptcy a few weeks later. How nobody—Wall Street’s best equity analysts, the country’s most prominent bankers, the rating agencies, a major accounting firm—nobody saw it coming. Right?”
Conner relaxed into his chair and chuckled. “I adore you, Jo.”
“But why?” she asked quietly.
He’d said it almost without thinking. “Because . . . because you’re such a wonderful person.” He winked. “With a nice figure and a—”
“No, no. Why do you want to know how a company could manipulate its earnings?”
“Oh. Oh, right. Well, I’m just doing some research.”
Jackie picked up a wrist exerciser from her desk and squeezed the handles. She’d broken her arm last fall skydiving and her doctor had recommended the exercise. “How’s Phenix Capital doing?” she asked.
“Fine. Why do you ask?”
“Starting an investment bank is tough. Even for a man like Gavin Smith.”
“So?”
“I’ve been a CPA for thirteen years, and I’m not surprised by much anymore. But one thing that still amazes me is how crazy people act when they get squeezed financially. Especially people who’ve never been in that situation.”
“What are you saying?” Conner asked evenly.
“I’m just asking a question.”
“Spin it out for me.”
Jackie hesitated, as if she wanted to say more. “No, let’s get started.”
“Come on.”
She shook her head.
“All right,” he agreed. He’d pulled on the door hard enough. He’d try pushing later.
“What you have to remember about accountants is that they’re just people,” Jackie began. “They aren’t computers.”
“Jo, I don’t need to hear a defense-of-the-profession speech. I’m not here to make a value judgment about—”
“They’re corruptible,” Jackie interrupted, folding her hands tightly in front of her. “Corruptible as any politician, banker, lawyer, or cop. And that’s the problem. That’s how a company can be worth billions one day and nothing the next. There has to be complicity.” She sighed. “Everyone gets those beautiful, glossy annual reports in the mail and never questions what’s between the covers. They get all warm and fuzzy when they see that color picture of the board of directors in the back. You know, the socially responsible country club ad. The one with the woman in a conservative dress and the respectable-looking black guy, all surrounded by twelve silver-haired Saxons.”
Conner held back a smile.
“And the board members all have sterling résumés. They’re CEOs of otherFortune 500 companies, professors emeritus of top business schools and ex-politicos. They’re so credible, investors can’t wait to snap up company shares. Those steely expressions tell us they’re tough and sophisticated and nothing bad is going to happen while they’re around.” Jackie flexed the wrist exerciser. “Problem is, most of them can’t balance their own checkbooks.
“And at the front of the annual report,” she continued, “there’s this letter from a big CPA firm because big companies can’t hire anything but big CPA firms. It wouldn’t look good if they didn’t. As if the big firms are so much better than little ones like mine. Anyway, the letter from the big firm brags about how they’ve burned the midnight oil to make certain the company’s numbers are fairly presented, and the name of the accounting firm is signed at the bottom. Not the name of the lead partner who’s responsible for the audit, mind you, but the name of the firm itself. Like we’re supposed to believe Mr. Arthur or Mr. Andersen actually got finger blisters themselves punching the old adding machines.”
“I appreciate what you’re saying, Jo,” Conner spoke up. “But I’m looking for specifics. I need to know—”
“I’ll get to all that, Conner. But it’s so important that youreally understand what I’m saying here. Most people don’t. It’s the key to
everything bad that’s going on in the business world right now—the lack of confidence in company numbers, the suspicions people have about corporate executives and Wall Street investment bankers and public accountants. Most investors think accounting is black-and-white. But there’s a lot of room for interpretation when it comes to keeping company books. Anytime there’s room for interpretation, there’s room for fraud. Like I said before, accountants can be bribed, manipulated, and intimidated just like anyone else.”
“Give me an example.”
Jackie drummed her fingers on the desk, thinking. “Accounting Firm X’s young storm troopers complete their annual audit ofFortune 500 Company Y, and one of them determines that Company Y’s internal accountants have been booking something incorrectly during the year. Nothing that’s going to start a major SEC investigation if it’s uncovered, mind you. Just something that doesn’t quite conform to generally accepted accounting principles. The young person at Accounting Firm X who finds the—” Jackie paused. “—inconsistency,as we’ll call it.” She smiled grimly, as though recalling this from personal experience. “The young person who finds the inconsistency brings it to the attention of the accounting firm’s lead partner, the individual who is ultimately responsible for approving the audit. The lead partner then meets privately with Company Y’s CFO at corporate headquarters and explains the problem. Lets the CFO know that when the glossy annual report with the picture of the woman, the black guy, and the twelve Saxons is released to the public, the earnings per share figure isn’t going to be quite as good as he told Wall Street it would be.
“This is bad news, Conner.Very bad because Company Y’s stock price has been going up over the last few months in anticipation of a great year. The great year the CFO has been bragging about to Wall Street analysts for months during those ‘off the record’ conversations CFOs aren’t supposed to have with the Street anymore. According to the lead partner, the downward revision of the earnings-per-share figure won’t be big, just a minor adjustment. But the CFO knows that these days analysts and investors are looking for any excuse to pound a company’s shares. Once one analyst puts out a ‘sell’ recommendation, they all jump on the bad news bandwagon and that’ll be that. The stock price will tank. So he’s got to do something fast.”
Jackie gazed at an old black-and-white picture of her mother and father on the credenza beside the desk. “Here’s the rub,” she said quietly. “Here’s how everything gets sideways. The CFO and the CEO ofFortune 500 Company Y have been granted tons of free stock options. Call options the twelve Saxons have been doling out for the past few years like Italian lire. A million here and a million there and nobody notices because the details of the option grants are buried in the back of a proxy statement you’d have to pop a whole box of N¯o-D¯oz to get through. And because the stock price has been reaching new highs over the last few months, those call options are way in the money. Worth gazillions. But the CFO knows that when the officially announced earnings-per-share figure is suddenly below forecast, the stock market will punish Company Y. Even if the EPS figure is off a little,” Jackie said, holding her thumb and forefinger barely apart. “And when the stock price dives, so does the value of the CFO’s options. Maybe to zero depending on the option strike prices. But the CFO is building a ten-million-dollar beach house in Boca Raton that he’s planning to pay for by exercising the options. And the CEO is doing the same thing in West Palm. Except that his new pad is costingthirty million. Without the option money, both of them are out of luck and the construction on their dream homes will come to a grinding halt. They’ll be facing personal bankruptcy and the Saxons will have no choice but to boot them out of the company. Because the perception in the market is that a corporate executive who can’t run his own life profitably shouldn’t be in charge of a multibillion-dollar company.
“Our CFO is in a sticky situation. His Boca beach house is on the line. So are his career and his reputation. His whole way of life, for crying out loud. His ability to keep up the ten-thousand-dollar monthly mortgage payment on his primary residence in Greenwich or Brentwood. His ability to keep his kids in the best private schools. His country club memberships. Everything he’s worked so hard for is about to go up in flames. He’s got to do something.
“He folds his arms across his chest and doesn’t say anything for a while, staring the accountant straight in the eye after getting the bad news. When the guy can’t take the heat anymore and finally looks away, our CFO starts talking. He tells the guy he’svery disappointed. That his internal accountants swore to him that the way they were doing the numbers all year was technically correct. That they had actually been relying on information from the accounting firm. When the accountant mumbles something into his hundred-and-fifty-dollar silk tie about how they were wrong, our CFO tells him that the board of directors was thinking about switching accounting firms last year. But that he personally recommended to the board to stay with this firm because of the solid personal relationship they had developed.
“Now it’s the lead partner’s turn to sweat. Accounting firms make tens of millions of dollars off justone Fortune 500 audit, and Company Y is by far this partner’s biggest grossing client. If Company Y switches its audit to another accounting firm, his personal compensation will drop like an airliner with engine failure and suddenly he won’t be able to makehis monthly mortgage payment. Now both men have a problem. When the EPS figure is released, the CFO will be out of a job. And with the CFO out of a job, the lead partner won’t have his internal advocate at Company Y, and the accounting engagement will go to another firm.
“A shiver runs up our lead partner’s spine. He thinks back to college and how his ethics professor warned him that sooner or later this day would come. The moment of truth. His life is flashing before his eyes, and he’s sweating like he’s running a marathon in the Sahara because now we’re edging toward criminal issues. He tells the CFO that he’ll think about things for a few days and get back to him. That’s code for, ‘I’ll look the other way this time, but don’t put me in this situation again.’ Problem is, now the accountant has complied with something that doesn’t conform to generally accepted accounting principles—and the CFO knows it. The chink in the armor is tiny, but that’s enough these days.
“They shake hands and the lead partner leaves, bouncing off walls on his way out of Company Y’s headquarters. Wondering all the way home how in the hell he got sucked into the fraud vortex so quickly.
“The CFO pats himself on the back, chuckling as he watches the accountant stumble away. He’s played it perfectly, he thinks to himself as he sits back down at his desk. He calls the builder down in Boca and tells the guy to get started on that wine cellar the wife wants. He’d been holding off on that extra because it’s going to cost another hundred grand and, somehow, it didn’t feel right. But now he’s confident about his personal financial situation again. The accounting firm has been corrupted. Life is beautiful.”
Jackie put the wrist exerciser down. “Next year, there’s a whole different issue with Company Y’s books and once again a junior person on the audit raises the issue with the lead partner. The lead partner politely thanks the junior guy, then tells him to keep his goddamned mouth shut. The web is expanding. And, this year, the issue isn’t up for interpretation. Itis black-and-white this time, and it’ll have ahuge downward impact on Company Y’s earnings-per-share figure if the books are revised. Fifteen to twenty percent negative. But the young guy doesn’t say anything either, because he’s got school loans he’s still paying off, and his first child is on the way—all of which the lead partner knows. This past weekend, the junior guy realized it’s going to take ten grand he doesn’t have to set up the nursery the way his wife wants it. Now he’s in the vortex, too.
“For a while, the junior guy doesn’t sleep well. His wife asks him what’s wrong, but, before he can answer, she puts his hand on her tummy because the baby is moving. He’s totally screwed now, and he’s thinking he’s headed st
raight for Leavenworth without passing ‘Go.’ He’s just waiting for the SEC to show up on his doorstep and lead him away in shackles like those poor bastards he’s seen on the evening news.
“But Company Y’s annual report comes out and nobody blinks an eye. The stock price keeps going up and nobody questions the numbers. Our junior guy starts doing better. He isn’t up at three in the morning watching Nick at Nite reruns. He’s in bed by eleven again, just like he used to be. Nestled beneath the covers next to his lovely wife who only has a month to go before she delivers. The nursery is even nicer than what she wanted thanks to the twenty-five-thousand-dollar ‘special’ bonus the lead partner surprised our young guy with.
“The only major change to our young guy’s routine is that he’s started to drink when he gets home. One or two glasses of red wine at first. Sometimes three. Suddenly, he’s draining an entire bottle every night. Suddenly, he understands those three scotches his father guzzled.”
Jackie glanced out the window at the building across Thirty-third Street. “The lead partner never even bothers to raise the big issue with Company Y’s CFO this year. He’s been sucked way down into the vortex, and now he’s just as guilty as the CFO. They’re clearly defrauding the shareholders, but making a mint at it. The CFO has exercised truckloads of options at stratospheric prices, and he’s loving his vacations to Boca. The house turned out great and the wine cellar is stocked with vintage bottles. The lead partner got a year-end bonus that’s twice what it was last year—over half a million—from which he personally gave the junior guy the twenty-five-thousand-dollar cut.
“And why is that, you ask? Why was the lead partner’s bonus so big this year? Because Company Y’s CFO handed the lead partner a big Christmas present. He retained Accounting Firm X’s consulting group to recommend strategic acquisitions, and he agreed to pay them five million dollars for a six-month engagement. The CFO has no intention of listening to mergers and acquisitions advice from Accounting Firm X’s consulting group—he has New York investment bankers for that and no savvy CFO would ever listen to a bunch of accountants about merger and aquisition advice. But it sounds good. And it isn’t as if the board is going to question him. The CFO ropedthem in, too. A few months ago, he proposed to the CEO that the Saxons and the two poster kids start getting options, too. The board took a vote on it, and what do you know? It’s unanimous. They think it’s a great idea. It’s like Congress considering a raise for themselves. Think that vote would ever fail?