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The AAO Weblog covers accounting issues and current events as they relate the practice of investment analysis. All posts prior to September, 2007 are in the public domain, but after September 4, 2007, only subscribers to The Analyst's Accounting Observer will see all posts going forward. Only selected, occasional posts will be released to the public domain from September 4 forward.

Interpublic Group: Better Late (Filing) Than Never
Location: BlogsAAO Weblog (Public)    
Posted by: Jack Ciesielski 9/30/2005 6:52 AM
Interpublic Group has finally filed its 2004 10-K, complete with restated information for 2003 and 2002. The company has been going through the mill over at least the last year, and investors have been in the dark when it comes to current, relevant financial information. The annual report incorporates their assessment of internal controls; as you might expect when a company is over six months late in filing an annual report and restates prior years, controls are in pretty bad shape. As for the auditor's assessment: they disclaimed on the controls.

The report lists a mere eighteen areas needing improvement, abstracted here:

"1. The Company did not maintain an effective control environment.

2. The Company did not maintain effective controls over the accounting for purchase business combinations.

3. The Company did not maintain effective controls over the accuracy and presentation and disclosure of recording of revenue.

4. The Company did not maintain effective controls to ensure that certain financial statement transactions were appropriately initiated, authorized, processed, documented and accurately recorded. This was primarily evident in the following specific areas: client contracts, incentives and rebates; write-offs of aged accounts receivable, expenditures billable to clients and amounts billable to clients; fixed assets purchases, disposals, and leases; accounts payable and accrued liabilities; payments made for employee compensation; cash and cash equivalents, wire transfers, and foreign currency transactions; arrangements with derivative instruments; intercompany transactions; purchase of equity of investments in unconsolidated entities; and
purchase, disposal or write-off of intangible assets.

5. The Company did not maintain effective controls over the complete and accurate recording of leases in accordance with GAAP.

6. The Company did not maintain effective controls over the accounting for income taxes in operations outside of the United States to ensure amounts are accurately accounted for in accordance with GAAP.

7. The Company did not maintain effective controls over reporting local income tax in the local statutory accounts or local income tax returns in operations outside of the United States.

8. The Company did not maintain effective controls relating to the completeness and accuracy of local payroll and compensation related liabilities in certain operations outside of the United States.

9. The Company did not maintain effective controls over the accuracy and completeness of the processing and monitoring of intercompany transactions, including appropriate authorization for intercompany charges.

10. The Company did not maintain effective controls over the reconciliation of certain financial statement accounts.

11. The Company did not maintain effective control over the monitoring of financial statement accounts to value and record them in a timely, accurate and complete manner. Specifically, controls were not designed and in place to: compare revenue recorded to amounts billed to clients; identify contracts with potential client rebates; analyze collectibility of aged accounts receivable or expenditures billable to clients; compare billable job costs to client cost estimates; review fixed asset records for under utilized, missing or fully depreciated assets; ensure that the underlying records support liabilities related to employee compensation, including an inventory of foreign employee pension plans, census data to calculate pension liabilities and changes made to benefit plans which impact the Company's compliance with certain employment and tax regulations; review intercompany balances for appropriate classification; review foreign currency translation adjustments; analyze accrued expenses and underlying equity of investments in unconsolidated entities; test intangible assets for impairments; or review equity accounts for appropriate roll-forward.

12. The Company did not maintain effective controls over the period end financial reporting process, particularly with regard to proper approval of journal entries and adequate review of financial statements.

13. The Company did not maintain effective controls over the safeguarding of assets.

14. The Company did not maintain effective controls over independent service providers.

15. The Company did not maintain effective controls over access to the Company's financial applications and data.

16. The Company did not maintain effective controls over spreadsheets used in the Company's financial reporting process.

17. The Company did not maintain effective controls over the communication of policies and procedures.

18. The Company did not maintain effective controls over monitoring the performance of proper application of the Company's internal controls over financial reporting and related policies and procedures."

For a company the size of Interpublic Group - $12 billion in assets, nearly $5 billion in market cap (as of last night) - that is quite possibly the record number of weaknesses in this first year of internal control reporting.

As the commercials say: "But wait - there's more." PricewaterhouseCoopers hasn't finished their audit of internal controls over financial reporting as of December 31, 2004; they disclaimed their opinion. And Interpublic admits that they have "extensive work remaining to remedy the material weaknesses described above."

Maybe there are more striking examples of a control environment gone amuck in a big-cap firm, but I don't know where they are. Drop me an e-mail if you do; please don't say Fannie Mae or Freddie Mac, because they are still works-in-progress.

This is going to be a very interesting stock market reaction to watch. A year ago, market participants were agog at the prospect that firms might report negative opinions on internal controls; now they brush them off, and often dismiss them as the province of small companies and with little concern over any implications of poor management (as long as they make the numbers, right?) This is no minor company; its internal control problems are not confined to one area; and they're still being evaluated and remedied. As I write this - before the opening of the stock market - the company is conducting a two-hour conference call to discuss the restated financials. It should be an interesting opening for the stock.
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