Monthly Archives: December 2004

Criminalizing auditors out of business

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As a part of a management shakeup, Fannie Mae decided late last week to fire KPMG LLP as its outside auditor after 35 years of service because its financial statements from 2001 through mid-2004 can “no longer should be relied upon.”
Oh well, announcements of accounting scandals are no longer any big deal in this post-Enron era where auditors are viewed by many as business cops that go on the take to cover up financial improprieties when they get too cozy with a client’s management.
However, what is not as widely reported is that Fannie Mae’s decision to dismiss KPMG is providing a glimpse of the big accounting firms’ increasingly precarious state of affairs. Indeed, with the firing of KPMG, it is not at all clear which big accounting firm is in a position to take on Fannie Mae as a client.
For all practical purposes, of the Big Four accounting firms — KPMG, Deloitte Touche Tohmatsu, Ernst & Young LLP and PricewaterhouseCoopers — Fannie Mae is left with essentially two choices: Deloitte & Touche LLP and PricewaterhouseCoopers.
Ernst & Young likely will not be the choice because it has already been advising Fannie’s audit committee and management in responding to various ongoing government probes. Similarly, Deloitte will not be the choice because it has been advising Fannie Mae’s chief regulator, the Office of Federal Housing Enterprise Oversight‘s (“Ofheo”) examination of Fannie’s accounting practices.
Normally, PricewaterhouseCoopers might be the choice because it does not currently provide any services to Fannie Mae. However, PricewaterhouseCoopers is the auditor for Freddie Mac, for whom it identified numerous accounting violations after replacing the criminalized Arthur Andersen LLP in 2002. Fannie Mae regulator Ofheo might not approve of both major mortgage corporations using PricewaterhouseCoopers as their outside auditor.
Consequently, the Fannie Mae situation highlights one of the largely ignored consequences of the federal government’s dubious decision to prosecute Andersen out of business over its role in the Enron accounting scandal: There are simply not enough big accounting firms left to provide audit services for the big companies that need them. Complicating matters even further is that each of the Big Four are literally under siege from civil lawsuits seeking large damage awards that could cripple any or all of them.
So, we already know that the government’s regulation of Andersen through criminalization of their audit services cost the marketplace thousands of jobs and one of the relatively few accounting firms that could provide the specialized services that big companies need. Now, we are coming to understand that this dubious governmental policy of criminalizing auditors may result in big companies not being able to to find auditors capable of providing adequate audit services at all.
Remember that the next time that you read a Justice Department press release touting its “success” in its prosecution of Andersen in connection with the Enron scandal.

Kellner takes over at Continental

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On Dec. 31, Larry Kellner — Houston-based Continental Airlines‘ president and chief operating officer — will take over as chief executive of Continental, replacing 63-year-old CEO Gordon Bethune, the former mechanic who pulled Continental from the brink of what would have been its third bankruptcy a decade ago.
This Wall Street Journal ($) article profiles Mr. Kellner and Continental, which is the nation’s fifth-largest airline with revenues of $8.87 billion over the past year. It is a good introduction to the new CEO of one of Houston’s largest employers. Check it out.

2004 Weekly local football review

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Texans 21 Jaguars 0

The Texans defense laid the wood to Jags’ QB Byron Leftwich in holding the Jags’ offense to 126 total yards and the Texans’ much maligned offensive line sprung RB Dominick Davis for 150 yards rushing and a TD as the Texans humbled the Jags in chilly Jacksonville, 21-0. The shutout was the first in Texans’ franchise history.
The Texans defense gave Leftwich a concussion early in this one, and the Jags QB could never get untracked as the Texans forced three turnovers and held the Jags to 54 yards passing. Meanwhile, the Texans offense generated 333 total yards behind another average but adequate performance by QB David Carr (14-20, 122 yds., 1 TD, 2 INT). Actually, Carr’s line would look better except that one of his interceptions came on a great play by Jags DB Dewayne Washington. Washington made a spectacular one-handed interception on a Carr pass that Andre Johnson probably would have taken to the house for his second TD catch of the game but for Washington’s incredible play. About the only phase of the Texans’ performance that was subpar on this day was the punt return team, which had one adventure after another while trying to cope with the absence of injured regular returner J.J. Moses.
The 7-8 Texans, who are clearly on a roll, could end the season with a .500 record with a win over the Browns at Reliant Stadium next Sunday. That would be quite an accomplishment for this third year franchise.

Cowboys 13 Redskins 10

Oh, how the might have fallen. In an excrutiatingly boring game between two teams with inept offenses, Cowboys QB Vinnie Testaverde somehow three a 39 yard TD pass to someone named Patrick Crayton with 30 seconds to go to pull out the win before a feisty crowd at Texas Stadium. The 6-9 Cowboys close this disastrous season next week at the Meadowlands against the Giants, and then the off-season process of revamping the Cowboys offense begins. It will not be an easy task.

Wishing you and your family Happy Holidays and Clear Thinking from the Kirkendall Family

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Is your surgeon a “Nintendo surgeon?”

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Following on this earlier post about video games being used as anesthetia for young patients, several of my surgeon friends, nephews, and my two sons are going to enjoy this latest finding:

Surgeons who play video games three hours a week have 37 percent fewer errors and accomplish tasks 27 percent faster, . . [based on] observation on results of tests using the video game Super Monkey Ball.

Link hat tip to Tyler Cowen, who hilariously suggests that maybe the surgeons and the patients could play each other?

What to do with the Astrodome?

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Following on this earlier post on the dilemma posed by the obsolescent Astrodome, this Richard Connelly Houston Press article does a good job of reviewing the Astrodome hotel project and the other options that are being considered.
Given the constraints posed by regular events at Reliant Stadium and the use of Reliant Park by the Houston Livestock Show and Rodeo and other conventions, retrofitting the Dome into a commercial development is not feasible. The Dome is an important part of Houston’s history, but its time is passed and the nostalgia is the only productive aspect of it that remains. It’s time to recognize that the only viable option is to demolish the Dome and use the valuable land for better and more productive purposes at Reliant Park.
Update: Charles Kuffner has an interesting thought on the Dome dilemma.

Updating the Yukos case — Gazprom confirms control of Yugansk

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Russian gas giant OAO Gazprom confirmed yesterday what everyone in the international oil and gas business suspected — that it will control Yuganskneftegaz (“Yugansk”), which was formerly the main oil-production unit of OAO Yukos. Here are the earlier posts about the Yukos chapter 11 case in Houston and the Russian government’s auction of Yugansk.
Gazprom’s control of the Yugansk unit — which generated 60% of Yukos’ oil and gas production — is a key development in the Russian government’s plan to transform Gazprom into a major international oil and gas company on the level of Exxon Mobil Corporation and other majors.
When the Russian government announced the auction of Yugansk earlier this fall in order to fund payment of a portion of Yukos’ alleged $28 billion tax debt, Gazprom — which is 60% owned by the Russian government — was generally considered to be the odd’s on favorite to be the winning bidder at the auction. However, Gazprom’s financing for its bid through Western financial institutions was undermined last Thursday by the entry of a TRO in Yukos’ surprise chapter 11 case in Houston. That TRO enjoined Western financial institutions from participating in financing an acquisition of Yugansk.
Nevertheless, Russian officials scurried around last Friday and Saturday to arrange alternative financing, and Baikal Finance Group — a new special purpose entity controlled by Russian individuals with close ties to Gazprom — submitted the winning bid at the auction. On this past Tuesday, Russian oil company OAO Rosneft — a Russian government-controlled company that Gazprom is acquiring in a previously announced merger — announced that it had purchased Baikal Finance. That announcement confirmed Gazprom’s effective control of the Yugansk unit.
By controlling the Yugansk unit, Gazprom adds a prodigious oil production unit to its already formidable gas production unit. Already the world’s largest producer of gas, Gazprom will now become one of the world’s biggest oil and gas companies with combined reserves that are about six times more than Exxon Mobil’s. Russia is second in world oil production after Saudi Arabia.
Nevertheless, the Kremlin’s heavy-handed handling of Yukos and its valuable Yugansk unit may have far reaching implications for Russian business interests in the international business community. The Russian government’s willingness to elevate its control of Russian oil and gas interests over the promotion of Western business interests is a serious deterrent to future Western investment in Russian companies. Yukos is now the poster boy of that policy — once a darling of Western investors, the Russian government’s actions have now rendered Yukos essentially worthless. It’s hard for the Moscow Chamber of Commerce to put a happy spin on that story in attempting to attract Western capital.
Moreover, Gazprom faces huge obstacles in maintaining a presence as a major oil and gas company. Although it is currently pumping huge quantities of natural gas, replacing that gas is not easy. Inasmuch as most of Gazprom’s reserves are in remote regions that require technological expertise that Gazprom does not currently possess, Gazprom will face increasing production costs as it attempts to maintain or increase its production levels. During the first half of this year, Gazprom’s net income fell 13% to $3 billion even though its revenue rose 12% to $15.7 billion. By way of comparison, Exxon Mobil earned $11 billion in the same period on revenue of $138 billion. Consequently, if oil and gas prices dip, Gazprom’s profit margins could be squeezed even further.
Meanwhile, Houston-based ConocoPhillips announced an agreement yesterday with Gazprom to study at development of the potentially lucrative Shtokman gas field in the Barents Sea. The study will evaluate the feasibility of producting and transporting liquefied natural gas from the field to the United States and European markets.
Discovered in 1988, The Shtokman field is estimated to contain more than 100 trillion cubic feet of gas. Inasmuch as it is located approximately 350 miles off the northwest coast of Russia in the South Barents Sea Basin in water depths of 1,000 feet, the Shtokman field will require at least three or four phases for full field development.
Earlier this year, ConocoPhillips became a large equity investor in Lukoil — another Russian oil major — and became a 30 percent partner in another exploration joint venture with Lukoil. ConocoPhillips announced earlier this week that it is increasing its equity stake in Lukoil to 10% by the end of the year.

The amazing Cubs

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The Chicago Cubs Baseball Club has always been considered somewhat of a lovable laughingstock around Chicago. Consequently, although the club’s swoon in this past baseball season’s National League Wild Card playoff race did not sit particularly well with Cubs fans, it was at least expected.
But according to this scathing Jay Mariotti Chicago Sun-Times article, the legendary incompetence of Cubs management may have risen to heretofore unforseen levels. Consider this snippet:

We understand the Cubs have a feeble, hapless Charlie Brown existence. We know they’re battling farm animals, perpetual paranoia and turtleneck-choked fans. But if they’re also so internally incompetent that they employ an unlicensed head trainer, who was ratted out by the assistant trainer just months after they fired the previous head trainer, then riddle me this, Ronnie Woo-Woo:
How are they supposed to win a World Series in our lifetime? When management is appointing alleged quacks to heal injuries on a team that lost Mark Prior, Kerry Wood and too many other players to the most mysterious disabled list I’ve seen in sports — remember the sneeze that toppled Sammy Sosa? — isn’t it time to dismiss the cause as hopeless and move on to junk bonds as a hobby?

Read on.

Death in Texas

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Sister Helen Prejean is a member of the Sisters of St. Joseph of Medaille in Louisiana. She is America’s leading abolitionist with regard to the death penalty and the author of Dead Man Walking, which was made into one of the best movies about the death penalty.
In the most recent issue of the New York Review of Books, this article is adapted from Sister Prejean’s new book, The Death of Innocents: An Eyewitness Account of Wrongful Executions that Random House is releasing next month. Sister Prejean sharply criticizes then-Governor George Bush’s denials of clemency to a large number of Texas death row defendants in Texas, noting that he distanced “himself from his legal and moral responsibility for executions.” The entire article is compelling reading, as the following excerpt reflects:

George W. Bush during his six years as governor of Texas presided over 152 executions, more than any other governor in the recent history of the United States. Bush has said: “I take every death penalty case seriously and review each case carefully…. Each case is major because each case is life or death.” In his autobiography, A Charge to Keep (1999), he wrote, “For every death penalty case, [legal counsel] brief[s] me thoroughly, reviews the arguments made by the prosecution and the defense, raises any doubts or problems or questions.” Bush called this a “fail-safe” method for ensuring “due process” and certainty of guilt.
He might have succeeded in bequeathing to history this image of himself as a scrupulously fair-minded governor if the journalist Alan Berlow had not used the Public Information Act to gain access to fifty-seven confidential death penalty memos that Bush’s legal counsel, Alberto R. Gonzales, whom President Bush has recently nominated to be attorney general of the United States, presented to him, usually on the very day of execution.[1] The reports Gonzales presented could not be more cursory. Take, for example, the case of Terry Washington, a mentally retarded man of thirty-three with the communication skills of a seven-year-old. Washington’s plea for clemency came before Governor Bush on the morning of May 6, 1997. After a thirty-minute briefing by Gonzales, Bush checked “Deny” ? just as he had denied twenty-nine other pleas for clemency in his first twenty-eight months as governor.
But Washington’s plea for clemency raised substantial issues, which called for thoughtful, fair-minded consideration, not the least of which was the fact that Washington’s mental handicap had never been presented to the jury that condemned him to death. Gonzales’s legal summary, however, omitted any mention of Washington’s mental limitations as well as the fact that his trial lawyer had failed to enlist the help of a mental health expert to testify on his client’s behalf. When Washington’s postconviction lawyers took on his defense, they researched deeply into his childhood and came up with horrifying evidence of abuse. Terry Washington, along with his ten siblings, had been beaten regularly with whips, water hoses, extension cords, wire hangers, and fan belts. This was mitigation of the strongest kind, but Washington’s jury never heard it. Nor is there any evidence that Gonzales told Bush about it.

The article concludes with the following observation:

As governor, Bush certainly did not stand apart in his routine refusal to deny clemency to death row petitioners, but what does set him apart is the sheer number of executions over which he has presided. Callous indifference to human suffering may also set Bush apart. He may be the only government official to mock a condemned person’s plea for mercy, then lie about it afterward, claiming humane feelings he never felt. On the contrary, it seems that Bush is comfortable with using violent solutions to solve troublesome social and political realities.

Read the entire article.

Medical Center notes 50 year anniversary of first transplant operation

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On the anniversary of the first kidney transplant in Boston 50 years ago, Eric Berger of the Chronicle does a fine job in this article of reviewing the accomplishments of Houston’s Texas Medical Center doctors in contributing to the advancement of transplant procedures. Inasmuch as the Chronicle does not maintain online links to many of its articles for very long, check it out soon.