Invoice Scam Outed

Cable World, June 23, 2003

Byline: MAVIS SCANLON

On June 25, 2002, after Adelphia Communications filed for bankruptcy protection, shares of Cablevision Systems plummeted 30% on renewed fears over the cable industry's accounting practices. Earlier that month, Cablevision and other operators, including Insight Communications and Mediacom Communications, issued press releases or hosted conference calls to outline their cable accounting policies, in large part to assure investors they were on the up-and-up.

Perhaps Cablevision's finance gurus were looking in the wrong place. Late Wednesday, Cablevision said it dismissed the president of AMC Networks, along with 13 others, after a five-month internal review uncovered millions in expenses that had been improperly accounted for at Rainbow Media Group, the company's programming unit. Internal auditors initially noticed something amiss with AMC's invoices; in some cases, invoices were fabricated, Cablevision said, without explaining the nature or purpose of the fabrications. The review, which covered 1999 through 2002 and was conducted by the company's internal auditors and KPMG, its external auditor, found that some AMC employees improperly recorded $6.2 million in expenses in 2002 that should have been allocated to 2003. Cablevision said similar amounts were improperly accrued in 2000 and 2001. The effect of the accelerated accruals would make year-over-year earnings comparisons more favorable.

"The company cannot tolerate any improprieties related to financial matters," said Cablevision president and CEO James Dolan in a statement.

In addition to Kate McEnroe, the well-regarded AMC Networks president who worked her way up through the company after starting there in 1981, other senior managers who were fired included AMC EVP and GM Noreen O'Loughlin, SVP and GM Martin von Ruden, SVP of marketing Isabel Miller, AMC/WE SVP Melani Griffith and VP of finance and operations Rorie Papsco. Josh Sapan, Rainbow's president and CEO, will take over McEnroe's duties, according to someone familiar with the matter. Cablevision declined to comment or confirm those fired; efforts to reach McEnroe were unsuccessful.

The glaringly public way the purge was handled caused some in the industry to cry foul and question whether McEnroe and an entire tier of managers were being made scapegoats. The biggest question is why this was not uncovered before. Of course, if fraudulent invoices were being produced, the company needed to make a strong show for shareholders that it eradicated the problem. Cablevision shares, which had rebounded to over $23 recently from a low of near $5 last August, remained relatively stable last week. On Friday, Cablevision traded at $21.48, down 2 cents.

The total amounts in question were "insignificant," according to the company, and no earnings restatement was required. Richard Greenfield, an analyst at independent research firm Fulcrum Global Partners, said the accounting problem had no impact on the company's cable business.

Although "you never want to see these things in a corporation," Greenfield said, especially with what's happened at Adelphia and the ongoing investigation at Charter Communications, "the important thing for investors to realize is that this is one-tenth of 1% of Rainbow's operating costs, and even less of Cablevision's as a company."

The good news is that management caught it and was proactive in replacing the management team, he added. Rainbow, which accounted for 39% of Cablevision's total 2002 revenue, posted $1.6 billion in revenue and $204 million in operating cash flow last year.

He also noted that this issue isn't likely to affect the potential sale of AMC; the company has expressed interest in contributing AMC and its sister networks, IFC and WE, to a bid by Edgar Bronfman Jr. for Vivendi Entertainment. The situation would have been far worse if a potential buyer had caught the problem, Greenfield said. The five months spent by internal and external auditors examining the books "drastically reduced my concerns about this going any further," he said.

The company's audit committee has hired high-powered securities attorney William McLucas of Wilmer Cutler & Pickering to conduct an investigation with the help of a forensic accounting firm he will hire. He may recommend changes to the company's internal financial controls. If this investigation uncovers further irregularities, it could cast a pall on Cablevision's efforts to sell or combine AMC with other networks and its efforts to spin off its DBS satellite unit in a public offering.

THE NEXT QUESTION:

*Cablevision is certainly not the only U.S. corporation that shifted expenses to make results look better. Who's next?