A Wall Street darling gets snared by an accounting scandal. Faulty bookkeeping forces lofty annual earnings to be restated as shocking losses.
The news crushes the stock, triggers securities investigations and ignites shareholder lawsuits. The chairman becomes the target of Securities and Exchange Commission proceedings.
Kenneth Lay and Enron Corp.â¢ Bernard Ebbers and WorldCom Inc.?
No. The former Chambers Development Co. and John Rangos Sr. — of Pittsburgh. The scandal in 1992 pushed the waste hauler and landfill developer into a merger. And the SEC investigation and angry shareholders’ allegations later were settled.
But with today’s investors burned by a raft of corporate accounting scandals, many may be wondering: Did Rangos and Chambers dodge a bullet a decade ago?
Outrage from investors scorched by Enron and other meltdowns produced sweeping reforms. On July 30, President Bush signed a get-tough law that overhauls accounting standards and enforcement, holds CEOs accountable for company financial reports, and carries up to 20 years of jail time when they falsify such records.
“I had what I considered a substantial-sized audit department with many professionals with a lot of degrees from many schools,” said Rangos, 73, Chambers’ former chairman, in his first detailed interview about the corporate fiasco of 10 years ago.
“I was never involved with the audit department at all. My expertise was in (landfill) construction,” said Rangos, in his office in The Trimont on Mt. Washington recently.
Some business ethicists don’t accept such explanations, however, especially given investors’ shaken trust in corporate accounting nowadays.
“Then, it’s up to the CEO to make sure those subordinates are honest and competent,” said attorney Charles Elson, director of the Corporate Governance Institute at the University of Delaware.
“It still comes down to: Can the CEO answer whether there’s anything in the financial reports that’s improper?” Elson said.
In Chambers’ case, there was plenty of improper financial reporting from headquarters in Penn Hills. Documents show landfill expenses were improperly capitalized and written off over time. Lacking were supporting documents, such as logs of operating times on earth-moving equipment.
The accounting errors forced Chambers to reclassify those costs as current expenses. Meaning, they got deducted from revenue that quarter, not over several years — an action that drastically cut earnings.
Chambers’ $50 million profit in 1991 had to be restated as a $72 million loss. Later, a more complete audit found that Chambers had inflated profits by $362 million going back to 1985.
Just like today’s accounting bombshells, Chambers’ earnings restatement on March 17, 1992, rocked its stock. Shares the next day plunged by more than $20 to $10.37.
At its zenith, Chambers employed about 5,000 people, including some 1,800 in this region. It operated state-of-the-art landfills in 11 states, including one in Monroeville.
“The money spent on developing those landfills was enormous,” said Joseph Stotlemyer, a former Chambers executive and board member. “But we also spent $1 million on a (Hewlett-Packard) mainframe at headquarters to capture all the accounting stuff.”
Chambers shares that traded at $37 before the accounting fiasco melted down to single digits. But documents show Rangos held onto more than 18.6 million shares when Chambers’ merged with USA Waste in June 1995.
“I didn’t sell my shares, like most big stockholders of their companies,” said Rangos. “I rode it all the way down to a buck and a half.”
Rangos currently presides over the John G. Rangos Sr. Family Foundation, Pittsburgh. Its more than $15 million fund aids children in developing countries. Rangos also is on the board of Duquesne University’s Rangos School of Health.
“Questions of capitalizing costs are issues that the accounting field has struggled with for a long time,” said William Rodgers Jr., a former Chambers board director.
The SEC said chief financial officer Richard Knight had instituted a “bottoms-up approach” to Chambers’ earnings. That is, he adjusted expense levels to inflate earnings enough to match Wall Street expectations.
That approach caught up with the company on March 5, 1992. Outside auditor Grant Thornton refused to sign off on Chambers’ earnings report for 1991 because the company could not supply supporting documents.
As head of internal audits, Stotlemyer told Rangos, who was “stunned.” In April 1992, Rangos fired Knight and Grant Thornton and brought in Deloitte & Touch as outside auditor.
Rangos partly blames Chambers’ faulty accounting on Wall Street pressure to boost earnings. And he agrees with laws recently signed by President Bush.
“Now, I think everybody knows if there’s a wrong-doing, there’s a price,” said Rangos.
Grant Thornton settled SEC charges by paying $8.8 million in 1995. The commission permanently barred Knight from serving as an accountant to publicly held companies.
Knight could not be located for comment.
The SEC, without issuing fines against Rangos, ordered him to exercise proper oversight over company financial reports in the future. The SEC cited Rangos for “failing to emphasize the importance of internal accounting controls and recordkeeping.”
Chambers paid a civil penalty of $500,000 to settle fraud charges brought by the SEC. The company also paid shareholders more than $90 million to settle a dozen lawsuits after Chambers’ stock crashed.
“The new steps being put in the statutes now go after CEOs that knowingly sign statements that are false,” said attorney Chuck Davidow, of Wilmer Cutler & Pickering, Washington, D.C. He represented Rangos during the federal probe and shareholder litigation.
“No one suggested at the time there was a basis for (Rangos) to know” Chambers’ books were faulty, said Davidow.
Chambers’ stock last traded at $6.31 on June 30, 1995, when it merged into USA Waste in a stock swap worth $431 million.
USA Waste in 1998 merged into industry giant Waste Management Inc. Ironically, its accounting scandal led to a record $7 million settlement with the SEC by Waste Management auditor, Arthur Andersen — former auditor for Enron.
|Rangos, Chambers timeline|
Buys Monroeville company, Chambers Development Inc.; begins hauling municipal waste and building landfills
Chambers posts revenue of $4.4 million
Company issues first stock to the public; revenue hits $31 million
Chambers stock splits for a third time
Accounting change transforms 1991’s $50 million profit into a $72 million loss; stock plunges $20 a share
Employment, once as high as 5,000, reduced to 1,500
Rangos agrees to merge Chambers into USA Waste Services Inc.
SEC settles fraud charge against Chambers, which pays $500,000 fine
U.S. court approves Chambers’ $90 million shareholder payment to settle lawsuits over 1992 stock crash
June 30, 1995
USA Waste completes deal to acquire Chambers