More Surprises Likely as Firms Post Earnings

SAN FRANCISCO —  Investors shaken by a slew of corporate accounting scandals are bracing for additional fallout as companies begin to announce their results from the second quarter.

Half of the companies in the Dow Jones industrial average will report quarterly numbers this week or next, and few expect the $3.9-billion restatement of expenses from WorldCom Inc. to be the last of its kind.

“I suspect there’s another shoe to drop. I just don’t know what that will be,” said Coleman Stipanovich, interim executive director of Florida’s State Board of Administration, which has $50 billion in U.S. stock holdings.

WorldCom isn’t the only contributor to jittery nerves.

The biggest problem identified by the No. 2 long-distance telecommunications company is the mislabeling of routine operating expenses as capital investment. To a market still recovering from the collapse of energy giant Enron Corp., though, the disclosures of wrongdoing and mistakes elsewhere seem to be coming from all directions.

At other major firms in recent weeks, Xerox Corp. said it inappropriately booked more revenue than earlier disclosed, Kmart Corp. restated nine months of results and Tyco International Ltd. drew scrutiny from the Securities and Exchange Commission over its accounting for acquisitions.

The sheer number of admissions leads some investors to believe that more companies will choose the current earnings season to join the procession to the confessional.

“After watching what has gone on at WorldCom, Tyco and Adelphia [Communications Corp.], the layer of people under top management are going to want to come clean. They will come forward because they fear if they discover something and don’t bring it up, they could go to jail,” said Jeff Van Harte, who manages about $5 billion in equities for Transamerica Investment Management in San Francisco.

Van Harte said he expects to see more accounting scandals revealed, but “it is impossible to tell where it will happen.”

Some analysts are speculating, though, drawing up lists of suspects based on a variety of criteria.

A number of investors are betting against companies audited by Arthur Andersen, which was convicted in the Enron scandal and was WorldCom’s auditor. Some Andersen clients may have been getting away with improper bookkeeping, they reason, while others that switched to new auditors recently may seize the opportunity to clear up gray areas.

Andersen’s hundreds of past clients range from such technology stalwarts as Oracle Corp. to media giant News Corp. to consumer-goods companies including Colgate-Palmolive Co.

Other stockholders are keeping a close eye on companies that have taken frequent charges or have grown rapidly through acquisitions, such as networking gear manufacturer Cisco Systems Inc.

Both those practices make financial reports harder to digest and can disguise poor operating results.

Tensions might be highest in the technology sector, which led the rush to embrace pro forma profits that exaggerated company performances. Many big tech companies also may get a jump on the new requirement, effective in the third quarter, that they disclose how much they are excluding from their reported expenses by awarding stock options to employees.

U.S. companies shelled out $47 billion in options during 2001, a Bear Stearns & Co. study reported in May. Microsoft Corp., Cisco and Nortel Networks Corp. were among the biggest offenders, each paying out more than $2 billion.

Even without more accounting bombshells, investors could be in for unpleasant news from big companies. Most companies will meet or exceed analysts’ expectations for the quarter just ended, but many could drastically scale back projections for the rest of the year, said Chuck Hill, director of research at Thomson First Call.

Intel, Oracle, Cisco and Hewlett-Packard Co. have said they don’t see much pickup in the next six months, Hill said.

“If we get a lot more of those statements, we’ll see a lot more slashing of estimates,” since analysts are still on record predicting an unlikely 110% increase in third-quarter technology firm profits from a year earlier, Hill said.

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Times staff writer Jerry Hirsch contributed to this report.