Household International Inc. on Wednesday became the first financial services company forced to restate earnings so that its top executives could vouch for its financials, as required by the Securities and Exchange Commission. < /P>The restatement - which lowered pretax earnings by $600 million over the past eight years - came as the deadline expired for big public companies to comply with the SEC's edict. By midday Wednesday all but six of the nation's largest banking companies had certified that their statements were accurate, a move the SEC required to boost investor confidence amid a string of corporate governance scandals.
Most had filed before the deadline, but PNC Financial Services Group Inc., FleetBoston Financial Corp., Bank of New York Co., Fifth Third Bancorp, Huntington Bancshares of Columbus, Ohio, and National City Corp. of Cleveland waited until Wednesday.
The initial wave of certifications applies only to the largest publicly traded firms. Under the Sarbanes-Oxley Act, the leaders of all public companies will be required to make similar attestations over the coming months.
In a conference call with analysts and reporters Wednesday, Household's chairman and chief executive officer, William F. Aldinger, tried to downplay the restatement, which he said stemmed from a "good-faith difference of opinion." On an after-tax basis, from 1994 to 2002 the company overstated earnings by $386 million - a relatively small amount, considering that its total earnings for the period were roughly $10 billion.
"Frankly, we were surprised," Mr. Aldinger said. "I don't think there is any culture that says we are cutting corners. We wouldn't try 'to cook the books' to improve our rate by two-tenths of one percent."
Some outsiders agreed with his assessment, but others blasted the Prospect Heights, Ill., lender.
Moshe Orenbuch, an analyst with Credit Suisse First Boston Corp., reiterated his "strong buy" rating on Household, despite shaving 10 cents off his 2002 earnings target, to $4.60. While the restatement caused Household's capital ratios to fall about 30 basis points, "this does not affect the way the company does business," he said.
But Daniel S. Loeb, a managing member with Third Point Partners LP, a money management firm in New York, saw it differently.
"This is really a half-billion-dollar pickup," he said on the call. "When you talked about this thing being a small matter of a difference of opinion, you seem to minimize a major error here that involves something of huge magnitude."
Another critic, William Ryan, an analyst with Portales Partners, wrote in a report issued Wednesday: "When the going gets tough … the accounting department gets going. Household has a history of using subtle accounting changes to hit estimates."
But investors seemed to take the news in stride. Household's stock sank in early trading, but recovered to gain less than 1%, to close at $38.09 a share. However, that is well below the stock's 52-week high of $68.45 a share last August.
Mr. Aldinger insisted that the restatement reflected nothing more than a difference in opinion on how to account for certain credit card assets.
The restatements, surfaced after a review by Household's new auditor, KPMG LLP, he said. (Household fired its longtime auditor, Arthur Andersen, in the wake of the Enron Corp. scandal).
KPMG recommended that Household revise its accounting policies regarding three credit card deals it entered between 1992 and 1999. Two of the deals were part of its MasterCard/Visa co-branding affinity credit card business; the third dealt with an unrelated card marketer.
Relying on the advice of Andersen, Household had treated its payments to these partners as prepaid assets and had amortized them over longer periods of time. However, KPMG officials said that Household should have either charged the payments against earnings at the time they were made or amortized them over shorter periods of time.
David Schoenholz, Household's president and chief operating officer, said that investors should not expect any more surprises.
After reviewing Household's financials for 1999-2001, KPMG had signed off on all of the firm's basic operations, including "merchant partnership agreements, the provision for credit losses and loan loss reserves, securitization accounting, income tax reserves, and litigation matters," Mr. Schoenholz said.
Mr. Ryan and other analysts did mention litigation as a potential problem for Household. For instance, the company has been besieged recently by several high-profile consumer groups seeking to eradicate predatory lending.
Spreads between the Treasury bond yield curve and Household's debt have widened to over 350 basis points in recent months. One source attributed that to concerns in the marketplace over a spate of lawsuits consumer groups have filed against Household over the last year.
William Lerach, a partner in the securities class-action law firm of Milberg, Weiss, Bershad, Hynes & Lerach, said Wednesday that Household will likely be sued over its restatement. "Because a restatement is an admission that financial statements were false before, it is virtually inevitable that any company that restates in a material amount will find itself in sued in a securities case."
Asked if his firm, which is representing Enron shareholders and is also involved in suits against Andersen and WorldCom Inc., has been retained to take action against Household, Mr. Lerach said: "A number of large investors have contacted us, and we are looking into that."
However, Mr. Orenbuch said that he still expects Hosuehold to maintain or increase its market share while complying with various state and local lending restrictions.
What's more, none of the three major Wall Street debt rating agencies changed their ratings on Household after the restatement. Fitch Inc. maintained its "A with negative outlook" rating on the company.
"While the avoidance of restatements through use of more conservative accounting would have clearly been preferable, similar restatements are not expected for Household in the future," Fitch said in a press statement.
