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STAGED NUMBERS Beazer is accused of using accounting tricks to manufacture a smooth earnings ride.
Beazer Homes USA, once the nation’s sixth-largest home builder, evidently hopes to extricate itself from a decade-long accounting mess by pinning it all on its former chief accountant.
Two weeks ago, the Atlanta-based company announced it had restated financial results for nine years and owned up to a series of financial internal controls problems that led to “accounting and financial reporting errors and/or irregularities,” after a year-long review by independent forensic accountants.
According to Beazer’s filings with the Securities and Exchange Commission, former chief accounting officer Michael Rand, who was fired last June after admitting to shredding documents related to Beazer’s mortgage origination practices, was involved in “collusion with some of the company’s business unit employees to inappropriately manipulate earnings.”
The company added that “we believe that our former chief accounting officer caused or permitted deficiencies to occur in the operating effectiveness of our internal controls through the override of certain documentation and financial accounting and reporting controls.”
Among the accounting mistakes cited were the improper classification and valuation of inventories of land and unsold homes, as well as of leasehold improvements, and improper revenue recognition.
The company did not return calls seeking comment but has said previously in a statement that it is cooperating fully with state, federal and SEC investigations. Mr. Rand could not be located for comment.
As with other notable blowups such as Enron and WorldCom, Beazer’s accounting chicanery seems to have been designed to make up for a slowdown in the company’s growth. Beazer saw revenue slump to $3.5 billion in fiscal 2007, from $5.4 billion in 2006, and it posted a loss of $411.1 million in 2007 after a profit of $368.8 million in 2006. While the company appears to have committed accounting errors for many years, the more serious problems seem to have developed only recently.
“If management wants to make the numbers, you push into gray areas, and obviously, a lot can go wrong and often it comes down to decisions by the CFO,” said Mark Lang, a professor of accounting at the University of North Carolina’s Kenan-Flagler School of Business, who was not commenting directly about Beazer. “It usually comes about when there’s a lot of pressure to make the quarter, which usually occurs when the economy starts to head south.”
Beazer has had the same CEO, Ian McCarthy, since before going public in 1994, while turnover in the CFO post has been frequent of late. The current CFO, Allan Merrill, replaced James O’Leary, who left to become CEO of another company in March 2007. Mr. O’Leary had succeeded David S. Weiss, who retired in August 2003 after serving as CFO since the company went public. The former chief accountant is “the obvious fall guy here,” said Vicki Bryan, a home-building industry analyst with Gimme Credit.
Charles Mulford, professor of accounting at the Georgia Institute of Technology, said that some of Beazer’s early accounting problems appear to have stemmed from simple errors and sloppy work, but more recent ones appear to have been a case of “abusive accounting management,” perhaps in an attempt to manipulate results, which is where fraud may arise.
Beazer’s accounting games seem to have involved the misuse of reserves to smooth earnings, according to Mr. Mulford, with reserves increased in good years to reduce earnings when they would otherwise have easily beaten analysts’ estimates, and reduced in lean years to make up for earnings shortfalls. He noted that such activity is reflected in Beazer’s restated results from 1998 to 2006, which showed a $27.6 million increase to retained earnings over that period.
Beazer is far from out of the woods after the restatements and its mea culpa via its SEC filings. The company’s mortgage lending operation is still under investigation by the U.S. attorney’s office for the Western District of North Carolina and the SEC for allegedly helping to arrange questionable loans for lower-income home buyers, resulting in high foreclosure rates. The company announced in February that it was leaving the mortgage origination business and has estimated that it could reach a settlement with federal officials for penalties of between $8 million and $15 million over its mortgage origination practices.
Separately, the SEC is continuing to investigate whether the company violated federal securities laws involving its “books and records, and internal accounting controls,” Beazer said in a filing.
As if its legal problems weren’t enough, the company posted a loss of $488.5 million in the first half of fiscal 2008, and the new-home market is not expected to turn around anytime soon.
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