Tuesday February 13 1:38 PM ET Corporate Accounting Woes Raise Red Flags

By Christopher Noble

BOSTON (Reuters) - A rash of accounting problems at big-name companies like Lucent Technologies Inc. (NYSE:LU - news) and Xerox Corp. (NYSE:XRX - news) has put another dent into the already battered psychology of institutional investors.

Coming on the heels of similar problems at troubled speech technology company Lernout & Hauspie (Nasdaq:LHSP - news) and Cendant Corp. (NYSE:CD - news), the revelations at New Jersey-based Lucent have investors feeling that another shoe may be about to drop.

``In general I am expecting more of this to happen, not less,'' said Lanny Thorndike, manager of the $395 million Century Capital Management medium capitalization value fund.

``Everyone is aggressively telling you their story is terrific and you have to step back and remind yourself that not everyone can be above average.''

Portfolio managers said they were wary that more cases of improper accounting practices may emerge in coming months as companies struggle to hit profit and growth targets in a slowing economy.

``There is certainly a momentum, an expectations momentum. You've got to perform or you're going to get clobbered,'' said Jack Sharry, retail division president at Phoenix Investment Partners in Enfield, Conn. ``There's mounting pressure, so I think they try to manage earnings, and it seems that some people are not very good at it.''

Fund managers have had reason to worry.

Telecommunications equipment maker Lucent, once a high-flying growth stock, took a beating last year on a slowdown in the telecommunications market and a drop in capital spending by its major customers.

In November, with the shares already down about 72 percent to about $21 from about $75 at the start of the year, Lucent said it had improperly booked $125 million in sales.

The stock fell another 16 percent on that news and is now down to $13.50, after the company said last week it was cooperating with a Securities and Exchange Commission (news - web sites) probe of its accounting practices and credit agencies downgraded its debt to a notch above junk bond status.

Office equipment giant Xerox, meanwhile, earlier this month said it found accounting irregularities at its Mexico unit and took a $120 million charge in 2000 related to Mexican accounting issues.

A former employee has sued the company, charging the accounting problems were just the tip of the iceberg and have happened in other branches around the world.

Xerox denied the charges. But the stock -- down about 80 percent in 2000 from about $23 at the start of the year as the company suffered from strategic missteps, billing problems and bad debts from customers -- is now trading at about $6.75.

Bankrupt Lernout & Hauspie of Belgium said in December revenues for the two years ended June 30, 2000, were overstated. The company has been sued by investors for violation of accounting rules, insider trading and stock manipulation.

Fund managers need to be more watchful than ever to catch early signs of deterioration in earnings quality or accounting hanky panky, said Chris Bonavico, who manages $1 billion in five funds for Transamerica Investment Services.

``You should always have a healthy skepticism and you should never love a stock so much that you can't just walk away from it,'' Bonavico said.

He said he never owned Lucent, not so much because of concern about its accounting practices but because he had doubts about its strategy.

In Lucent's case, there were red flags long before the SEC probe. A history of financing sales to vendors and worries that it booked revenues on sales to its distributors, a practice known as channel stuffing, should have warned off investors.

``The quality of earnings was very low,'' said Bonavico. ''Their channels were being stuffed and they were financing their customers, and how long can that go on,'' he said.

Tuesday February 13 1:38 PM ET Corporate Accounting Woes Raise Red Flags

By Christopher Noble

BOSTON (Reuters) - A rash of accounting problems at big-name companies like Lucent Technologies Inc. (NYSE:LU - news) and Xerox Corp. (NYSE:XRX - news) has put another dent into the already battered psychology of institutional investors.

Coming on the heels of similar problems at troubled speech technology company Lernout & Hauspie (Nasdaq:LHSP - news) and Cendant Corp. (NYSE:CD - news), the revelations at New Jersey-based Lucent have investors feeling that another shoe may be about to drop.

``In general I am expecting more of this to happen, not less,'' said Lanny Thorndike, manager of the $395 million Century Capital Management medium capitalization value fund.

``Everyone is aggressively telling you their story is terrific and you have to step back and remind yourself that not everyone can be above average.''

Portfolio managers said they were wary that more cases of improper accounting practices may emerge in coming months as companies struggle to hit profit and growth targets in a slowing economy.

``There is certainly a momentum, an expectations momentum. You've got to perform or you're going to get clobbered,'' said Jack Sharry, retail division president at Phoenix Investment Partners in Enfield, Conn. ``There's mounting pressure, so I think they try to manage earnings, and it seems that some people are not very good at it.''

Fund managers have had reason to worry.

Telecommunications equipment maker Lucent, once a high-flying growth stock, took a beating last year on a slowdown in the telecommunications market and a drop in capital spending by its major customers.

In November, with the shares already down about 72 percent to about $21 from about $75 at the start of the year, Lucent said it had improperly booked $125 million in sales.

The stock fell another 16 percent on that news and is now down to $13.50, after the company said last week it was cooperating with a Securities and Exchange Commission (news - web sites) probe of its accounting practices and credit agencies downgraded its debt to a notch above junk bond status.

Office equipment giant Xerox, meanwhile, earlier this month said it found accounting irregularities at its Mexico unit and took a $120 million charge in 2000 related to Mexican accounting issues.

A former employee has sued the company, charging the accounting problems were just the tip of the iceberg and have happened in other branches around the world.

Xerox denied the charges. But the stock -- down about 80 percent in 2000 from about $23 at the start of the year as the company suffered from strategic missteps, billing problems and bad debts from customers -- is now trading at about $6.75.

Bankrupt Lernout & Hauspie of Belgium said in December revenues for the two years ended June 30, 2000, were overstated. The company has been sued by investors for violation of accounting rules, insider trading and stock manipulation.

Fund managers need to be more watchful than ever to catch early signs of deterioration in earnings quality or accounting hanky panky, said Chris Bonavico, who manages $1 billion in five funds for Transamerica Investment Services.

``You should always have a healthy skepticism and you should never love a stock so much that you can't just walk away from it,'' Bonavico said.

He said he never owned Lucent, not so much because of concern about its accounting practices but because he had doubts about its strategy.

In Lucent's case, there were red flags long before the SEC probe. A history of financing sales to vendors and worries that it booked revenues on sales to its distributors, a practice known as channel stuffing, should have warned off investors.

``The quality of earnings was very low,'' said Bonavico. ''Their channels were being stuffed and they were financing their customers, and how long can that go on,'' he said.

-- Carl Jenkins (somewherepress@aol.com), February 13, 2001