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AYEeesh - Accountants least of Allegheny's woes

March 21, 2004|by Steve L. Klick

Given various negative public comments regarding Allegheny Energy's accounting staff, it's time for a true accounting of its accounting.

During my 26-year career, I served as assistant controller for Potomac Edison and testified as an expert witness on accounting and financial matters in many company rate cases. In my opinion, here's the bottom line: the accounting difficulties are not the result of staff performance and/or training, as suggested by the new Allegheny Energy executive team. Rather, they are a direct consequence of a series of events triggered by poor guidance by an army of consultants.

In 1996, the operating companies of Allegheny Energy (Potomac Edison, Mon Power, West Penn) were consolidated in a corporate reengineering process. As part of that process, driven by consultants in a wave of irrational reaction to competition in the electric industry and an obsession with earnings-per-share growth, the accounting staff was downsized significantly.

The redesigned accounting process eliminated "hand-offs" in transaction processing as well as redundancies; but proper accounting is all about this kind of detail including, as key components, separation of duties (hand-offs) and internal controls (intended redundancies). The slide had begun.

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The slope of the slide went vertical in 1999 due to the company's growth-at-any-cost strategy. New accounting challenges ranged from difficult (Mountaineer Gas acquisition) to impossible (Global Energy Markets led by Dan Gordon). Additionally, accounting was viewed as an overhead by key executives who applied constant pressure to reduce these costs further.

The new team in town (well, not Hagerstown anymore) also represented publicly that 1/2 to 2/3 of the accounting staff would be dismissed. Actually, although the accounting staff has experienced high turnover, it is overwhelmingly due to folks electing not to relocate, not individual performance issues.

Unfortunately, even analysts on Wall Street have bought into the unfair characterization of Allegheny Energy accounting. On Oct. 30, 2003, an article in The Herald-Mail quoted an analyst as follows: "No fraud has been discovered, just stupidity." Incorrect and insensitive.

Lack of responsibility and accountability also deserve mention. What happened to the company's long-time audit firm, Price Waterhouse Coopers? They end up with more billable hours and revenue on both the audit and consulting sides. (Audit fees are only 62 percent of the total fees). Oxymoronic is being nice.

Looking at the bigger picture, Allegheny Energy finished last in 10-year shareholder return versus their peer group. (Wall Street Journal, March 8), yet the executives who stood watch over operations and accounting were rewarded with platinum parachutes as high as $4 million. And the new CEO's compensation package will likely total $50 million over the next five years, according to the company's 10 K filing. These are figures even accountants cannot warm up to.

Understaffed to start and then faced with a non accounting-friendly corporate culture, along with the look-the-other-way treatment of Gordon, Allegheny's accountants do not deserve the smoke-and-mirrors finger pointing. Although perhaps "not rocket science" (CEO quote), accounting is more complex and important than ever. Friends, neighbors and employers should continue their confidence in the quality of the accounting staff at Allegheny Energy - in fact, these folks have earned even greater levels of respect via their performance and loyality under fire.




Steve L. Klick is a resident of Hagerstown.

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