Accounting scandals of the past few years and the subsequent federal reporting rules enacted to prevent them — most notably the Sarbanes-Oxley Act of 2002 — have made life more difficult for chief financial officers in the media industry.
But many take the sometimes-onerous accounting regulations as a means to prove to the public and the government that scandals at Adelphia Communications Corp. and Enron Corp. were isolated incidents.
“I sleep very well at night,” said Cox Communications Inc. CFO Jimmy Hayes, speaking last month at the Broadcast Cable Financial Management Association/Broadcast Cable Credit Association conference in Atlanta. “When we had to start signing our financials, we did so without hesitation.”
HOW MANY HOURS?
But Hayes admitted that the new rules have caused some problems. He said that the federal Sarbanes-Oxley rule — which requires the top officers of public companies to personally guarantee the veracity of their publicly filed financial statements and financial reporting controls — forces Cox to perform 17,000 man-hours of internal financial work (including 7,000 man-hours logged by outside financial auditors). Hayes estimated that the cost of Sarbanes-Oxley alone is in the millions of dollars for Cox.
“Definitely it’s a lot more work,” Hayes said. “Employees rally around the fact that they want to prove to the government and the public that we really are doing the right thing.”
Hayes pointed to a Securities and Exchange Commission request to review Cox’s 2002 10-K annual report — the agency reviewed 10-Ks from 500 other companies as well. After 120 days of scrutiny, Hayes said, Cox was pleased that no changes had to be made to the company’s financial statements or accounting policies.
When the SEC sent a letter to Cox regarding two questions it had for the company’s 2003 annual report, Hayes said, those queries were answered in 22 minutes.
While Hayes said that experience was a good one for Cox, he added that he believes that the logic behind Sarbanes-Oxley is a bit flawed.
“The rule has been a tremendous overreaction,” Hayes said. “Every company needs good accounting controls and procedures. It boils down to integrity. The best controls won’t help a company that has lost its integrity.”
Washington Post Co. CFO John Morse said that Sarbanes-Oxley has had other ramifications on how his company does business. The Post Co.’s holdings include MSO Cable One Inc.
“We can’t do a fourth-quarter acquisition that is significant,” Morse said at the conference. “When you tell the CEO you can’t do it because of Sarbanes-Oxley, he’s not going to be very understanding.”
Hayes said most of that overreaction came after the Enron debacle, in which a series of off-balance sheet transactions hid billions of dollars of company debt and artificially inflated profits.
When those transactions were finally exposed, Enron fell like a house of cards.
Shortly after the Enron story broke, Hayes said, his office started getting a lot of calls from analysts and investors regarding its balance sheet and debt.
“For Cox it was a good story — we’re not overleveraged, but we have a fair amount of complexity,” Hayes said.
That complexity was mainly a series of hybrid securities Cox used to finance about $10 billion of acquisitions between 1999 and 2000. Those securities — called PHONES and PRIDES — were tied to the performance of Sprint PCS stock Cox held and served their purpose in financing those acquisitions, but were becoming increasingly volatile as Sprint shares fluctuated.
“Complexity was OK in 1999,” Hayes said. “We said, 'Let’s get rid of all the hybrid securities, simplify the balance sheet and eliminate a lot of the volatility.’ Positive change came out of the negative things that happened.”
Morse had a unique solution for changing Wall Street expectations: saying nothing.
“More companies should do what we do here — not talking to the Street, not giving guidance,” Morse said. “You’re building expectations and creating a false sense of security [by issuing guidance].
“The Street guys don’t have long-term interests at heart. A good company understands about long-term investment of shareholders. [Giving guidance] sends the wrong message. I’m hoping we’ll see some companies move away from that.”
HARD NOT TO GUIDE
While that may be a sound strategy for a company like the Post Co. — its stock is very closely held, it has only 9.5 million shares outstanding and it trades in the $900-per-share range — Hayes had a different view.
“That’s an interesting concept,” Hayes said. “We have 42 analysts covering our stock. Not providing guidance, we recognize, would result in a substantial amount of volatility in the stock. With guidance, make sure you don’t get out of the realm.”
