In the spring of 1999, when the Securities and Exchange Commission needed a staff accountant in its enforcement division, Douglas Boe figured he was the man.
Then 37 and an assistant controller in a division of Hughes Electronics Corp., Boe had an impeccable finance pedigree: a BS and an MS in accounting from the University of Virginia, an MBA from Indiana University, auditing experience at Arthur Andersen & Co., and wide- ranging assignments at Motorola Inc., AlliedSignal Inc., and Hughes. What's more, he had a keen interest in the ongoing earnings- management crusade of SEC chairman Arthur Levitt, who in a 1998 speech had fretted that "managing may be giving way to manipulation, integrity may be losing out to illusion." Boe said as much in his E-mail application to the SEC, stating that he had "experienced first-handed [sic] financial improprieties about which Mr. Levitt has so eloquently spoken."
Boe's background and avowed passion for probity caught the agency's eye. He was invited to Washington, D.C., for interviews, and the job was his, he recalls--pending a reference check. "My father had been a civil servant," Boe told CFO. "I really wanted to work for the SEC. I was willing to take a $30,000 cut in pay to do it."
But a week later, the job offer was rescinded. Although Boe was given two positive recommendations, Richard Wallman, then AlliedSignal's CFO, allegedly told the SEC's Regina Barrett that Boe's work was "inconsistent." According to Barrett, Wallman said he ought to consult his lawyer and declined to comment further on Boe, saying, "What does that tell you?"
Stunned as Boe was by the SEC's reversal, he shouldn't have been surprised that the agency got conflicting reports about him. In June 1998, he'd been fired as a division controller at AlliedSignal after a company psychiatrist sounded alarms about erratic behavior that had recently been diagnosed as bipolar disorder-- manic depression. And shortly before applying for the SEC job, in April 1999, Boe had filed a lawsuit against AlliedSignal, alleging wrongful discharge. The real reason he was fired, he claimed, was that he was a whistleblower. According to Boe, AlliedSignal repeatedly used improper accounting practices to meet Wall Street's earnings expectations and trigger executive bonuses.
"Corporations that do what AlliedSignal did, which is make one favorable accounting adjustment after another to juice income, must be stopped," Boe asserts now. "There was a saying around AlliedSignal that some of our best engineers are accountants." A trial on Boe's lawsuit, which also accuses the company of violating the Americans with Disabilities Act (ADA) and interfering with his effort to work at the SEC, is scheduled to begin on February 27 in U.S. District Court in Kansas City, Kansas.
No one at AlliedSignal, which had sales of $15 billion when it merged with Honeywell Inc. in December 1999 and became Honeywell International Inc., would discuss the company's defense. "It would be inappropriate for us to comment, given that we are heading to trial in this case," says in-house counsel Patrick McGovern.
But given the SEC's crackdown on earnings management, the stakes could be higher than the $30 million in damages that Boe is suing for. "To the extent that these allegations have merit," says Dana Hermanson, an associate professor of accounting and the director of research at the Corporate Governance Center at Kennesaw (Georgia) State University, "this is the kind of stuff that Arthur Levitt has been talking about: adjusting the numbers to reach some target."
BOE'S EXPLOSIVE CLAIMS--as spelled out in his 397-page deposition and in a series of interviews--tell a tale of a promising finance career derailed by an unwillingness to play along with alleged accounting gamesmanship. In two memos written in May 1997, while Boe was still working at AlliedSignal, he outlines such practices as unsubstantiated reversals of reserves, deferred write-offs of losses, and inappropriate inventory valuations.
Attempts to corroborate Boe's account proved difficult, because many former colleagues contacted for this story still work at the company, are potential witnesses, or expressed fear of retaliation if they spoke up. However, court files obtained by CFO contain documents and deposition testimony that confirm Boe often voiced concerns about erroneous accounting entries, and that others at AlliedSignal were similarly troubled about such improprieties.
But Boe's case is hardly open-and-shut.
In September 1997, two AlliedSignal internal auditors investigated the allegations in Boe's two memos and concluded that most were baseless. "The [auditors'] report stated that some alleged improprieties were improper or insufficiently supported," AlliedSignal's attorneys wrote in a pretrial motion, "but that others were properly supported or were within acceptable management judgment."
There is also some dispute about how vocal Boe was about his concerns. "I was never in any meeting with Doug Boe where he said the accounting was incorrect," says Tom Zusi, a former aerospace sector CFO at AlliedSignal who met with Boe and others on occasion to review accounting and internal control issues. And in a twist worthy of an Alfred Hitchcock movie, Boe at one point found himself the target of an investigation that accused him of cooking the books.
Then there are the questions about Boe's emotional stability. As his accounting concerns grew, his bipolar symptoms of sleeplessness, sharp mood swings, racing thoughts, rapid speech, and difficulty concentrating were making it harder for him to deal with the daily pressures of his job.
He would eventually take a leave of absence to seek treatment by a psychiatrist and get stabilized on medication. But AlliedSignal rebuffed his efforts to return to his old job or obtain another assignment at the company. A letter notifying Boe that he was fired stated that his "often disruptive, unpredictable, and volatile behavior...has caused many employees to express continued fear and concerns about working with you."
"I find it particularly heinous," Boe retorts, "that they used my disability as an excuse to get me out, when the motivation was the fact that I was not in line with their practice of 'making the numbers' by 'making up the numbers.'"
Which story will the Kansas City jury believe-- the story of an embattled crusader for honest accounting, or the story of a corporation trying to cope with a difficult employee?
WHAT'S ABSOLUTELY certain is that Doug Boe's career at AlliedSignal began auspiciously enough.
Working at Motorola and eager for advancement, Boe was hired in May 1995 as controller of the $500 million Commercial Avionics Systems (CAS) division in AlliedSignal's aerospace sector, which is now based in Olathe, Kansas. His starting salary was $100,000, an $18,000 increase over what he made at Motorola. Eventually given a 12 percent raise and stock options, he was also sent to an advanced leadership training course. He was on the fast track.
In his first performance appraisal, in February 1996, Boe got generally high marks for his efforts running a 67- person accounting shop. The only suggestion for improvement, Boe claims, was that he should be "more flexible" in his application of accounting principles. According to Boe, he was told by CAS division CFO Andy Wilson that his superiors felt that he "shouldn't be so tied to GAAP." (Wilson, who was not deposed, did not return several messages left at his home.)
It was around the time of the job review that the avionics division reversed $5.8 million in purchase-price reserves related to a 1994 acquisition. The division leaders were going to the company's board of directors to get approval for a restructuring proposal to consolidate various facilities, Boe explains. Without those improper entries, he asserts, the financial statements would have shown a loss.
"We were violating GAAP as a means of deluding our own board," claims Boe, who went along with the alleged charade because he feared he would be fired if he didn't. (In their report, AlliedSignal's auditors concluded that the reversal was supportable.)
For the rest of 1996 and into 1997, while AlliedSignal CEO Larry Bossidy was promising Wall Street double-digit earnings growth each quarter, the avionics division was struggling to hit its profit targets, Boe recalls. So after the books were closed on each quarter, he and his team were ordered to scour the balance sheet for adjustments, he charges.
"We were up well into the night thinking up various accounting tricks," says Boe. Some, he insists, were blatant rule violations (writing off excess inventory on the books gradually, rather than immediately; not writing off losses associated with a failed joint venture and a canceled building project). Others, contends Boe, simply had no economic substance to them (draining bad debt reserves despite no improvement in collections, and reducing warranty accounts despite no evidence of lower warranty costs).
In all, the adjustments constituted a fraction of the $206 million in 1996 net income for the entire aerospace sector (and the $1 billion in corporate profits). But Boe counters that the adjustments were material to the avionics division and may have affected bonuses, which were tied to year-over-year earnings growth. Without the adjustments, he claims, the division would have missed its profit promise to the aerospace sector for the 1996 year-end-- and would have had its first-ever loss in the first quarter of 1997.
"When we did forecasting for each quarter, there was always a 'go-get,'" says Boe. "We'd make a promise, but we really didn't have the backlog, sales, margins, and average selling price to add up to that total. We'd dread the end of the quarter, because we knew the boss would come knocking and say, 'Go find me more income.'"
Wilson was the one who gave the marching orders, Boe contends, but Zusi, then CFO of the aerospace sector, was the one allegedly squeezing Wilson. In his deposition, Boe recalls a meeting at which Zusi was asked how excess inventory on the books could be written off over several quarters. "Complete silence" is how Boe characterizes Zusi's response.
Boe's administrative assistant Shannon Webb, in an attachment to her 1997 severance agreement with AlliedSignal, stated that on numerous occasions she observed Wilson instructing Boe and two accounting managers to make questionable entries. The three would strenuously object, confirms Webb in an interview, and Wilson would express his own uneasiness. But he would then assert that Zusi had ordered the entries and that all four of them might be fired if the entries were not made, says Webb.
Zusi, who was not deposed for trial, denies that he ever made such threats or encouraged anyone to use accounting legerdemain to manage earnings. "Whether someone feels pressure or not, I can't be the judge," he told CFO.
GROWING UP IN suburban Virginia, Boe was 11 when his 62-year-old father was hospitalized during a visit to his hometown of St. Louis. The doctors would diagnose him as a manic-depressive, and he would briefly return to work as an accountant in the government's General Accounting Office before retiring. That family trauma would cast a pall over Boe's childhood--and intrude on his adulthood as pressures intensified at AlliedSignal.
By late 1996, Boe began to butt heads with colleagues and, he claims, face reprisals. On one occasion, he called a company hot line for reporting ethical concerns because a human resources manager refused to get him data on the cash advances given to division employees who traveled to be interviewed for internal job opportunities. That money counted as compensation, and he needed the totals for tax reasons. Boe got action--the payout list was compiled--but he alleges that because of the call, a promised raise of 6 percent was delayed by three months.
Though Boe had often complained to Wilson about having to make improper accounting entries, he decided a stronger protest was necessary. In January 1997, Boe refused to sign the management representation letter certifying the year-end 1996 financial results (he would do the same for the first quarter of 1997). Then, in February, he took his concerns to the division's ethics coordinator, something she confirms in her deposition. But he was greeted, he claims, with the suggestion that he find other work if he felt uncomfortable.
Events took a surprising turn in March 1997, when an anonymous caller to the company's ethics hot line accused Boe and two of his deputies of shifting as much as $10 million in division expenses from 1996 to 1997 to hit 1996 profit targets. A month-long inquiry into the charges enraged Boe. "I didn't sign the management representation letters, and all of a sudden I'm the one being investigated," he exclaims. "I thought it was retaliatory when the company knew I had been objecting about accounting manipulations."
In the end, Boe and his colleagues were cleared, even though the investigation prompted Robert Croft, the division's manager of internal controls, to write a scathing memo in which he concluded that the books were indeed "gamed" by the three accused individuals. He then went on to cite as the "root cause" Boe's ambition, his resentment over negative feedback, and staff changes that moved out many CPAs and rewarded those most loyal to him.
"In my opinion," Croft wrote, "this organizational evolution has resulted in an accounting organization whose managers are excessively supportive and compliant ('yes men'), providing generally positive feedback to Doug Boe, with little or no significant 'pushback' on important issues which have come up and affected the [division's] income." (Croft, who still works at the company, would not comment for this story.)
To Boe, such accusations reflect the petty squabbles that arise any time jobs are shuffled. Several of those he promoted to key roles were close friends, he concedes, but many have since progressed rapidly at the company, an indication that others also viewed them as highly qualified. In his last performance review before he was fired, Boe was cited for doubling productivity while cutting staff.
As for whether Boe was truly the one to blame, he maintains that Croft would often ask him about recording certain write-offs--such as, says Boe, when an accounts receivable reconciliation showed $3 million less than what was on the books in the general ledger. "I'd say, 'Andy [Wilson] won't let me do it,' or 'Andy dictated that we're going to make these adjustments,'" Boe recalls. "'Go talk to Andy about it if you want.'"
In his memo, Croft indicates that he did speak with Wilson, who denied pressuring Boe to do anything inappropriate. "I have no way of ascertaining the 'truth,'" Croft wrote, though he suggests that the pressure Boe felt to "make the numbers" may have been self- imposed. "Doug's desire to be successful has overridden all else," Croft stated.
Boe scoffs at that notion. "I would have been an idiot to complain [about accounting practices] if I was only interested in advancing my career," he says.
Which is why Croft is considered a favorable witness by Boe and his attorney. He concurs that the books were cooked.
WHETHER OTHERS WERE truly plotting against him, Boe readily admits he was experiencing what felt like a nervous breakdown. "I was talking to my mother about the symptoms I was having mentally and emotionally," he recalls, "and she said it sounded like what my father had." A few weeks after the anonymous accusation against him, Boe sought psychiatric care and began taking a series of pills to help him cope.
He did his best to hold his crumbling world together, but that effort gave way on June 20, when Boe became so manic that he had to be sent home, never to return to work at AlliedSignal. What caused him to lose it was a front-page story in that morning's Wall Street Journal.
For the previous two weeks, Boe had been barraged with phone messages from a Journal reporter, Quentin Hardy, who wanted him to comment on a long-running feud between Motorola and a customer that dated back to Boe's tenure at Motorola. Boe had been a credit officer; collecting from the customer, On-Call Inc., had been his responsibility.
Boe became so anxious about the story that one day a co-worker found him at the end of a hallway, red-faced and sweating, rocking back and forth and wadding up a piece of paper in his hands. It didn't help that when Boe explained what was worrying him, company lawyers pressured him to make sure that AlliedSignal's name didn't appear in the newspaper.
Finally granting Hardy's request for an interview, and after convincing a Journal editor not to print where he now worked, Boe offered a single quote that was extraneous to the thrust of the article, but not to his now- tenuous career at AlliedSignal: "In March 1995 I resigned from Motorola out of concern with unethical business practices directly related to my job, including collection of debts at On- Call."
Even with medication, Boe was so distraught on the day the story was published that he felt compelled to hand out copies and talk about it at a staff meeting. He'd just been investigated for accounting improprieties at AlliedSignal; he wanted others to know that he had not been involved in doing anything wrong at Motorola. But the interim CFO (by this time, Andy Wilson had left the company) would not let Boe speak, and an hour later Boe was asked to leave for the day.
BOE KNEW HE WAS very sick, and immediately went on a leave of absence. He attended therapy sessions every other week and did what he could to relax. He exercised, took a trip to California, went home to Virginia to visit his parents, and spent much of his time reading newspapers and watching television.
By January 1998, according to his doctor, Boe was well enough to work again. He would accept a transfer to any AlliedSignal site in the world, but Boe didn't want to go job-hunting as he came off disability. "It was more about getting back on my feet than that this was the most desirable company to work for," he says.
AlliedSignal first wanted him examined by its own psychiatrist, however. In her report, Dr. Rosalyn Innis found that Boe was "competent," but she also expressed concern. Because of his "strong paranoid component," she wrote, "the potential for a comment or glance to be reinterpreted [sic] with a negative slant is still there." She didn't think he should return.
On June 4, 1998, Boe received via FedEx a letter notifying him that he was fired. The decision to terminate him had been made primarily by Zusi and human resources manager Tammy Wolfe. In the letter, Wolfe said that Boe's bizarre behavior in the two weeks before the Journal article appeared had "destroyed the trust that must exist in any employment relationship." In her deposition, she testified that women in the office had been fearful of Boe. She related that one even thought he was going to come in with a gun and "start blowing people away."
Boe rejects such comments, noting that there is nothing in his personnel file to indicate he had threatened anyone. The dire alarms about how dangerous he might be were unjustified, he says. He had already been stabilized on a cocktail of prescription drugs, and since October 1998 he has worked at Hughes without any behavioral incidents. Indeed, his 2000 performance review noted that he "accepts responsibility and criticism willingly and acts in a dependable and professional manner."
Although his current job as a division assistant controller represents a lateral move at best, Boe says he's thankful for a chance to be working again and for having a supportive boss. He might even have tried to put the past behind him, he claims, if SEC chairman Levitt hadn't begun to speak out so strongly against earnings management in late 1998.
"What I saw at AlliedSignal was shocking," Boe says of his decision to sue. "I wasn't going to let my life pass with something like this going unchecked. I don't think the SEC alone can stop the earnings management that goes on today."
BUT IS DOUGLAS BOE the hero he makes himself out to be? Or is he an unreliable witness on accounting issues that are far from black-and-white?
Short of calling Boe crazy, AlliedSignal can be expected at trial to chip away at his credibility by asking why he didn't do more to raise concerns while at the company, and by portraying him as a malcontent who was also hypersensitive to ethical concerns at Motorola. Although Boe registered his objections with his division CFO and ethics coordinator, he never went up the chain of command. One superior, Michael Potter, the aerospace sector's director of internal control, told the internal auditors who looked into Boe's claims that while it was "not unusual" for Boe to get on his "soap box," Boe would offer only "high-level" comments and no specific facts.
In an interview, former sector CFO Zusi says he didn't know that Boe had refused to sign the management-rep letters until the audit investigation began, which was after Boe went on leave. Before then, he says, he never heard reports from Potter, or from anyone else to whom Boe was speaking, about how the division kept its books.
Richard Wallman, now CFO of Honeywell International, is even more pointed in his assessment that Boe didn't do enough to alert others. In March 1997, on a visit to the Kansas avionics facility, Wallman spent 15 minutes in private with Boe, and he heard nothing about the accounting practices that troubled the controller. "He met with me and said everything is all right," Wallman recalled in his deposition.
Boe acknowledges that he could have made a fuss with Wallman, but says he saw the meeting as an opportunity to impress the CFO. For several months, he had been angling for a transfer to a post in Phoenix, he explains, and he wanted to enhance his chances. "I figured I'd let this go on and get out of there," says Boe.
IF BOE HAS HIS WAY, the disputed accounting entries will take center stage at the trial. He doesn't have to prove that the avionics division was managing earnings, only that he was fired after voicing suspicions of wrongdoing that he had a good-faith basis for believing were true. Under such circumstances, "the law says you can't fire a whistleblower, even if he is completely off- base," says Boe's attorney, David Peterson of Peterson & Associates P.C., in Kansas City, Missouri. "But the jury will want to know if AlliedSignal violated accounting principles."
So how much substance do Boe's allegations have?
The September 1997 report by two internal auditors, Stuart J. Black and Brett Weinblatt, suggests very little. Yet some of the accounting deemed OK was questionable: $4 million in purchase-price reserves was reversed to income, not goodwill, because of an "error" where "similar rationalization costs" were accrued again in a restructuring plan; $1.3 million from the same reserve balance was reversed before the new plan took effect, a GAAP violation the auditors considered "immaterial"; and $6 million in inventory adjustments was written off gradually, not immediately, as GAAP requires.
And even though Black and Weinblatt reasoned that management used its discretion properly when it reduced reserves for bad debt, warranty costs, and errors and omissions, they could find no documentation to support the lower balances. "It's discouraging the number of times the internal audit report indicates that there was no underlying analysis available for these judgmental estimates," comments Kennesaw State's Hermanson, who reviewed the available accounting-related documents in this case.
But does that mean that the earnings were managed, as Boe alleges? The evidence in these documents is circumstantial, says Hermanson, the co-author of a recent study of 200 financial fraud cases, but it is also highly suggestive. "There appear to be a lot of adjustments at the end of periods to change the balances in very judgmental accounts," he notes. "This is essentially where you would play the games if you wanted to play games."
Because there were so many adjustments, Hermanson says, the jury would want to hear about how these lower reserve estimates were developed. Was there a genuine concern that individual line-items were somehow overstated, or was the division looking for more income? "The argument will center around these judgments: Were they reasonable or not?" he suggests.
That will prove difficult to determine. The internal auditors note that their efforts were hamstrung by a lack of back-up material and the fact that key people had already left the company. And that's not all. Both Black and Weinblatt acknowledged in their depositions that they had lost the work papers they amassed while investigating Boe's claims.
IRONICALLY, IT'S also possible that none of this will matter when the trial begins.
In a motion for summary judgment filed last fall, defense lawyers asked Judge G. Thomas Van Bebber to dismiss all the counts in Boe's lawsuit related to his claim that he was fired for reporting accounting improprieties. The lawyers argue that his discharge was based on the psychiatrist's report, and that those "to whom he arguably blew the whistle" were not involved in the decision to fire him. If the judge agrees--Van Bebber had not ruled on the motion when this story went to press--that would leave only the issue of whether Boe's rights were violated under the ADA.
A ruling in AlliedSignal's favor "would be a shame, and I realize that's a possibility," admits Boe. But the ADA charges are still important to him, he adds. "As a second- generation manic-depressive, to set a precedent that you can't discriminate in the workplace against someone like me would mean a lot."
And there's always the possibility that the SEC might want to take a look at what went on in that AlliedSignal division. Though if Boe had secured a job at the agency, he would have been precluded from working on SEC business related to all former employers.
Stephen Barr is senior contributing editor of CFO.