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Audit   1 - Duke Energy Employee Advocate

Duke Power Audit - Page 4

Duke Understated Profits

The Charlotte Observer by Ted Reed - October 24, 2002

Utility disputes claim it intended to mislead; whistleblower satisfied

(10/23/02) - Duke Power Co. underreported $124 million in profits from 1998 to 2000, seeking in some cases to mislead regulators, an audit of a whistleblower's claim concluded Tuesday.

The Carolinas largest utility feared that full disclosure of its profits could lead to a cut in customer power rates, said the report by accountant Grant Thornton LLP. Regulators rely on information provided by utilities to set rates.

"Duke undertook a coordinated effort to identify and record (entries) which would lower Duke's net utility operating income reported to the state commissions," Grant Thornton said in the report, which was requested by regulators and took 10 months to compile.

The utility acknowledged accounting errors, but disputed key findings of the audit, saying there was no intentional wrongdoing by any employee and that it was not seeking to "manage" its returns.

"The Grant Thornton report is one accounting firm's opinion about complex issues and judgments in regulatory accounting," Duke said. "There are `expert opinions' on both sides of complex issues."

Duke and Carolinas regulators have negotiated a proposed settlement to the dispute. The settlement would entitle residential customers to several dollars over 12 months starting in the summer of 2003 as a result of fuel cost adjustments, said Duke spokesman Tom Williams.

The benefit would occur because Duke agreed to a $25 million credit to reduce the amount customers pay for the utility's fuel.

"Consumers get a direct benefit in that Duke stockholders will absorb $25 million worth of fuel costs," said Gary Walsh, executive director of the S.C. Public Service Commission. Duke Power is a subsidiary of Charlotte-based Duke Energy Corp.

Of the credit, $18.75 million would go to the N.C. account and $6.25 million to the S.C. account, reflecting the proportion of Duke's 2.1 million customers in the two states.

The settlement also provides that Duke would restore about $50 million to its nuclear insurance reserve fund. The bulk of Duke's underreporting involved money in the fund.

The $50 million "could be used to reduce rates the next time the commission moves to set Duke rates," said Jo Anne Sanford, chairman of the N.C. Utilities Commission. In both Carolinas, Duke's last rate adjustment was in 1991.

Duke, while not acknowledging wrongdoing, said the settlement "is for the purpose of terminating a dispute."

Utilities commissioners in both states will vote on the agreement next week. If they approve, Duke would take a $19 million charge to its fourth-quarter earnings.

Duke shares fell nearly $2 on Tuesday just after the audit results were reported, but rebounded to close at $19.65, down 43 cents.

Concerns about Duke accounting were first raised by Duke accountant Barron Stone, who contacted S.C. regulator Walsh in 2001. On Tuesday, Stone said the audit was "an accurate portrayal of conclusions that I believed from day one."

Stone said Duke executives should be blamed, not rank-and-file Duke employees. "People at the officer level in the company directed people in their charge to participate in this," he said.

A key conclusion of Grant Thornton's findings was that Duke managers intentionally misled regulators. The Observer in December reported a similar conclusion based on reporters' review of accounting documents.

Grant Thornton said Duke officials were concerned about the threat of a rate reduction after the S.C. Public Service Commission in 1998 reduced rates charged by S.C. Electric & Gas. That utility had exceeded its allowed rate of return, or the profit it earned after covering costs for providing power.

Duke is allowed a 12.25 percent return in South Carolina and a 12.5 percent return in North Carolina.

To avoid exceeding the allowed return, Don Stratton, Duke's manager of rates and regulatory affairs, prepared a spreadsheet that calculated Duke needed "$70 million (in) additional expense items," said the report.

Later, during Grant Thornton's investigation, "the demeanor of witnesses in sworn depositions ranged from candid and cooperative to what appeared to investigators to be deliberate evasiveness," the report said.

Rick Ealey, assistant controller, "stated under oath that representations he had made in an electronic memo were `not true' when he made them," the report said. "The statement confirms the existence of Duke's plan to deal with what it perceived to be an `allowed return problem' through a number of accounting reclassifications or adjustments."

The report didn't address whether Bill Coley, president of Duke Power, was aware of the extent of the accounting changes.

However, Coley approved a move to ensure that the reclassified expenses would not reduce bonus programs for employees and executives, the report said.

Duke spokesman Williams would not say how much Coley knew about the reclassifications. "There was no intention of wrongdoing by any Duke employee," Williams reiterated.

Williams said Grant Thornton "inappropriately casts a negative tone" on Duke Power's year-end 1998 review of its returns. He said Duke is required by regulators to review annually how close it has come to its allowed profit.

Duke looked at the SCE&G case "as any business would, but to suggest that that is inappropriate is wrong," he said. Even if Grant Thornton's conclusions are correct, he added, Duke has not exceeded its allowed return in South Carolina and has consistently been within range of its allowed N.C. return, more often below than above.

Three key issues accounted for the bulk of the $124 million that Duke underreported.

  • About $84 million involves how Duke classified insurance rebates on its nuclear power plants. In 1998, Duke reversed a previous accounting practice of reporting the rebates in utility accounts. The change had the effect of reducing regulated returns. The practice continued in 1999 and 2000.

  • About $18 million involves the movement of income tax liability related to Duke Energy's 1997 acquisition of Houston's PanEnergy. "When they acquired PanEnergy there was tax liability, and that tax liability got transferred over to the electric retail customers," Walsh said.

  • About $6 million involves Duke's decision to stop selling electrical appliances. Duke took a charge for the amount as a regulated expense, when it should have been a nonregulated expense, the report said.

Duke cooperated fully with Grant Thornton, releasing more than 13,000 pages of documents and assigning staff to assist the firm, Williams said. In addition, Duke paid the $800,000 cost of the audit.

Duke Left Out Customers

Associated Press - October 24, 2002

(10/23/02) - CHARLOTTE, N.C. - Some of Duke Power Co.'s largest North Carolina customers oppose a $25 million settlement offered after an independent audit found the utility underreported profits for three years to keep from cutting electricity rates.

An independent audit released Tuesday found Duke Power hid nearly $124 million. The utility did not admit wrongdoing in the deal that must be approved by regulators in North Carolina and South Carolina.

"We feel the consumer was left out of the process and there was no public scrutiny," Sharon Miller, executive director of the Carolina Utility Customers Association, said Wednesday. CUCA represents companies ranging from GlaxoSmithKline, R.J. Reynolds Tobacco Holdings Inc., and Cone Mills Corp.

A Duke Power spokesman said the association was using the case to re-ignite its failed efforts to persuade state regulators to conduct the first full-blown investigation of Duke Power's rates in more than a decade.

In July, the North Carolina Utility Commission rejected CUCA's request for a rate investigation. The commission said a new state law passed in June froze power-company rates in exchange for reduced coal-plant emissions.

"This issue is between the commission and Duke," said Duke Power spokesman Tom Williams. "It's our understanding that they (commission members) are strongly considering the proposed settlement."

Miller said the audit's findings support her group's argument for a full investigation of Duke's rates.

"We opposed the closed-door investigation and now we're opposed to the closed-door settlement," she said. "We need a top-to-bottom look at Duke's records."

The audit of Duke Power's accounts said the utility, which serves parts of North Carolina and South Carolina, devised a plan to underreport earnings by nearly $124 million over a three-year period. Regulators in both states must approve the proposed deal.

"Duke undertook a coordinated effort to identify and record (entries) which would lower Duke's net utility operating income reported to the state commissions," Boston auditing firm Grant Thornton LLP said in the report, which was requested by regulators from both states and took 10 months to complete.

The settlement would entitle residential customers to several dollars over 12 months starting in the summer of 2003 as a result of fuel cost adjustments, Williams said.

Charlotte-based Duke Energy Corp., Duke Power's parent company, would take a $19 million charge against its fourth-quarter earnings as a result of the deal.

Concerns about Duke's accounting practices were first raised by Duke accountant Barron Stone, who contacted South Carolina regulators in 2001. He said Duke excluded refunds it received from nuclear-plant insurance and included executive compensation and other costs that should have been charged to shareholders.

The settlement provides that Duke Power would restore about $50 million to its nuclear insurance reserve fund. More than $80 million of Duke's underreporting involved money in the fund.

The audit said Duke officials were concerned about the threat of a rate reduction after the South Carolina Public Service Commission in 1998 reduced rates charged by another utility.

To avoid exceeding the allowed return, Don Stratton, Duke's manager of rates and regulatory affairs, prepared a spreadsheet that calculated Duke needed "$70 million (in) additional expense items," said the report.

Duke Energy did not admit wrongdoing in the proposed settlement. The company acknowledged its internal investigation found that some accounting errors were made.

North Carolina regulators will discuss the proposed settlement Monday. The South Carolina Public Service Commission meet the next day.

Duke to Pay Customers $25 Million

Wall Street Journal October 24, 2002

(10/23/02) - Duke Energy Corp.'s regulated electric utility, Duke Power, agreed to pay $25 million to its customers to settle allegations the company had underreported profit in order to avoid having to reduce its electricity rates.

Energy regulators in North Carolina and South Carolina had ordered an audit of Duke Power's books. The inquiry, conducted by accounting firm Grant Thornton LLP, found the utility had failed to report about $123 million in pretax income from 1998 to 2000. The audit's conclusions were submitted yesterday to regulators in those states, where Duke Power provides power to two million customers. The North Carolina Utilities Commission and the Public Service Commission of South Carolina are scheduled to vote on the settlement next week.

"They manipulated their earnings in an effort to ensure that they didn't report numbers above the authorized rate of return," said Gary Walsh, executive director of the South Carolina commission.

Grant Thornton concluded that the $123 million in accounting entries were "inconsistent with applicable accounting principles, inconsistent with Duke Power's past practice and without proper justification." The report says there was a coordinated effort by the utility unit's top management to underreport net income by overreporting expenses, specifically insurance for its nuclear operations.

Duke Energy, in a written statement, said it had reached "different professional opinions" than Grant Thornton on the accounting issues but had agreed to change the way it accounts for certain items, specifically nuclear insurance, as part of the proposed settlement. Duke Energy, which hasn't admitted to any wrongdoing, said it would take a $19 million charge in the fourth quarter in connection with the settlement if it is approved.

Duke Energy said, "the tone and presentation of Grant Thornton's report inappropriately characterizes the business process followed, the accounting decisions made and the intent of our employees during the 1998 year-end closing of the books."

The utility's underreporting to regulators didn't affect Duke Energy's report of net income, the Grant Thornton report said.

Duke spokeswoman Cathy Roche said the company had kept the Securities and Exchange Commission informed about the investigation, and that the agency hasn't initiated any inquiries related to it. The SEC is conducting a separate inquiry into trading practices by Duke Energy and other firms.

Duke Power's accounting problems started in late 1998 when a neighboring utility was ordered to cut rates to its customers after it had earned more than the amount allowed by state regulators. According to the audit of Duke Power's books, as well as Duke internal documents cited in the report, Duke executives at that point realized their utility risked a similar order and decided they had to change the handling of certain accounting items to avoid showing too high a rate of return.

Regulated utilities, which have a captive customer base, are authorized to earn a specific rate of return on their capital investment. To earn that money, regulators set a rate that the utility can charge its customers for the electricity. If the cost of fuel and other operations goes down and a utility earns more than its authorized rate of return, regulators could cut the rate a utility charges it customers.

In January 1999, Rick Ealey, Duke Power's assistant controller, wrote in an e-mail: "We are currently looking at reclassification entries as discussed . . . to help with our `allowed return' problem." He noted that "in our efforts to manage sometimes conflicting goals . . . we get boxed in and cannot accommodate all of these," the e-mail, attached to the report, said.

Another memo stated that "for the last two quarters in 1998, Duke Power has been earning a higher rate of return than allowed by the current rate structure. We have come up with the following strategies to reduce Duke Power's current rate of return."

Duke Agrees to Settle - After Audit

Greenville News by Rudolph Bell - October 24, 2002

(10/22/02) - An outside auditor said Tuesday Duke Power engaged in a "coordinated plan" to underreport more than $123 million in earnings, and its Charlotte-based parent agreed to pay $19 million to settle its case with regulators.

Duke Energy Corp., parent of the Upstate's dominant electric utility, strongly disputed the findings of accounting firm Grant Thornton LLP, saying the auditor had uncovered no evidence of deliberate wrongdoing.

At the same time, Duke said it has agreed to a settlement with regulators that will reduce its fourth-quarter earnings by $19 million. Gary Walsh, executive director of South Carolina's Public Service Commission, said the settlement will benefit Duke's 500,000 customers in the state beginning in June 2003.

The outside audit was ordered by regulators in South Carolina and North Carolina last year after a Duke whistleblower alleged his company had misrepresented earnings. As a public utility, Duke must return excess profits to consumers in the form of lower power rates.

In a report released Tuesday, Grant Thorton said it had uncovered evidence of a plan by Duke managers to reclassify expenses. Their goal was to "enhance Duke Power's regulatory position" without compromising the earnings of Duke Energy or employee bonuses, Grant Thornton said.

Duke blasted the Grant Thornton report, saying it "fails to include ... evidence that exonerates Duke of any allegation of intentional wrongful conduct." Duke also said in a statement that the report is "prosecutorial in tone, contains inconsistencies and unsupported references" and that Grant Thornton was acting improperly as "judge and jury."

Even if Grant Thorton is right, Duke said, retail electricity rates would not have changed for Duke's 2 million customers in the Carolinas.

Electric utilities such as Duke Power -- because they are monopolies -- are typically restricted in how much they can charge customers and how much of their revenues they can keep as profit. Regulators in the Carolinas rely on figures supplied by Duke to decide those issues.

Since 1991, South Carolina has allowed Duke a return on equity of 12.25 percent.

Boston-based Grant Thornton said Duke "inappropriately" accounted for a variety of expenses in its reports to state regulators for its 1998, 1999 and 2000 fiscal years. Some of Duke's accounting entries, it said, were "completely without accounting justification under any accepted accounting standards."

Duke managers developed the plan after South Carolina Electric and Gas earned more than it was allowed to earn in 1998, prompting South Carolina regulators to reduce how much that utility could charge customers, Grant Thornton said.

Under the settlement, Duke would amend reports to state and federal regulators, restore a reserve account for nuclear insurance and pay $25 million for fuel costs that it otherwise would be allowed to pass on to ratepayers.

Walsh helped negotiate the settlement and said it will "absolutely be a direct benefit to the ratepayer."

The South Carolina utility-regulating body and the North Carolina Utilities Commission are scheduled to vote on the settlement next week.

Mignon L. Clyburn, chairwoman of the South Carolina commission, said she was still reviewing the proposed settlement and had no comment on how she would vote.

Regulators ordered the audit after Duke accountant Barron Stone reported alleged accounting improprieties to Walsh in the summer of 2001.

Tuesday, Stone said the report verifies "what seemed very obvious to me." He still works for Duke.

Duke conducted its own investigation after the allegations surfaced last year, but its conclusions differed from Grant Thornton's.

Duke found that in 1998 it had mistakenly classified millions of dollars in executive compensation, insurance reserves, power plant study costs and costs associated with shutting down its electric appliance business. But it said last year there was no evidence of deliberate wrongdoing -- and it maintained that position Tuesday.

Grant Thornton said it reviewed nearly 1,300 Duke records, including e-mails and internal memoranda, and took 30 sworn depositions from Duke employees and others. Even so, the firm said it didn't get all the documents it wanted.

"Although many witnesses reported that Duke had a document retention policy, no one questioned by investigators -- including Duke Power CEO William A. Coley -- knew what the policy was, to whom it was disseminated, or what documents it covered," Grant Thorton said.

The report cites a spreadsheet prepared by two Duke accountants as saying that for two quarters in 1998 Duke was "earning a higher rate of return than allowed by the current rate structure. We have come up with the following strategies to reduce Duke Power's current rate of return."

Duke Energy Stock in Freefall October 23, 2002

(10/22/02) - 12:31PM Duke Energy tumbles on accounting issues (DUK) 18.96 -1.12: -- Update -- Stock has gone into freefall over the past 10 minutes, rapidly giving up almost 2 pts. Traders are attributing weakness to Dow Jones report that Duke had $124 mln in "inappropriate" accounting. According to an auditor, Duke intended to underreport regulated profits.

Duke Energy Understated Regulated Profits

Dow Jones Newswires by Mary Ellen Lloyd October 23, 2002

(10/22/02) - CHARLOTTE, N.C. -- An independent audit of Duke Energy Corp.'s Duke Power unit ordered as part of a two-state regulatory investigation found the utility inappropriately made accounting changes that underreported its regulated profits by $123.6 million between 1998 and 2000.

In a report, auditor Grant Thornton LLP said its investigation found that a number of Duke mid- to senior-level managers developed a plan in 1998 to make changes that would "minimize Duke's earned return as reported to the state commission, but would not impact or lower Duke Energy's consolidated earnings as reported to its investors or the Securities and Exchange Commission."

Duke Power has entered into a proposed settlement with the North Carolina Utilities Commission and the South Carolina Public Service Commission over the issue. Duke Energy said in a statement the settlement would result in a fourth- quarter charge of $19 million.

Grant Thornton began the audit in January, and the firm's report is based on the sworn testimony of Duke employees and a review of more than 13,000 Duke records.

The North Carolina regulators will consider the proposed settlement at its meeting Monday, and their counterparts in South Carolina will take it up the following day.

Grant Thornton said its investigation found Duke's plan for accounting adjustments was in response to the South Carolina commission's 1998 order that Scana Corp.'s (SCG) South Carolina Electric & Gas unit reduce its rates after that utility reported earning over its allowed rate of return for the fiscal year ended Sept. 30, 1998.

In its response to the audit, Duke Energy said it disagrees its accounting treatment for some items, such as nuclear-insurance rebate distributions, was inappropriate. The company added it regrets it failed to detail to the South Carolina commission significant changes to its prior accounting practices, but Duke also said no intentional wrongdoing was committed by its employees.

"The tone and presentation of Grant Thornton's report inappropriately characterizes the business process followed, the accounting decisions made and the intent of our employees," the company added.

As part of the proposed settlement, the $19 million charge will include a $25 million credit to its 2002 deferred fuel accounts in the two states. Those funds would be incorporated in annual fuel-adjustment calculations from the summer of 2003 to the summer of 2004 and could potentially help offset rising fuel prices.

Duke Energy will also restore its nuclear-insurance reserves to levels it would have reached had Duke Power not changed its accounting for the insurance distributions in 1998. In addition, Duke said it will correct a 1998 error related to its Price-Anderson Act nuclear reserve. The firm said the impact of the changes in the insurance entries is a net increase to income of $6 million.

The regulatory investigation was prompted in July 2001 when Duke employee Barron Stone called the company's ethics hotline with concerns about accounting irregularities during the year-end closing of 1998 books. Mr. Stone, 39 years old, is a certified public accountant who worked in Duke Power's finance department from September 1997 to August 2000 and now works as a senior forecast analyst in Duke Energy's corporate controller's office.

He originally made his complaint anonymously to both Duke and state regulators last year, but went public in August amid a dispute with the company over being reassigned to another job.

Reached Tuesday, Mr. Stone said the audit's findings generally confirmed his allegations that Duke's accounting practices were contrary to federal regulations and generally accepted accounting principles. "I think that Grant Thornton's tone and their conclusion on the major issues are correct," he added.

Mr. Stone went on to say, "I've said from the very beginning that I believe we went into this intentionally" to avoid a rate review by state regulators. He noted he had also supplied information regarding his allegations to the SEC.

Duke is allowed to earn a 12.5% maximum rate of return on electricity it sells in North Carolina, and a 12.25% return in South Carolina. Grant Thornton determined that some of the investigated entries were made to prevent Duke's reported return from triggering a rate review.

"One Duke manager is on record as targeting $70 million of 'additional expenses' as being needed 'to avoid reporting over-earnings to regulators,'" the auditor said.

Grant Thornton's 37-page audit report identified entries totaling $64.4 million in 1998 that inappropriately reduced Duke's pretax utility operating income reported to the state commissions. The auditor said Duke Power's reported pretax operating income was inappropriately lowered by $24 million in 1999 and $ 35.2 million in 2000.

Duke spokesman Tom Williams said more than $84 million of those entries between 1998 and 2000 involved putting into nonutility accounts distributions from the company that insures its nuclear-plant operations. Grant Thornton said those entries were "contrary to applicable accounting practices, industry practices and Duke's past practices." But the company maintains its accounting treatment was correct.

Another $16.9 million in entries are those Duke's own investigation in August 2001 determined had at least partially been inappropriately assigned to electric operations.

Duke on Tuesday said that even if one assumes the auditor's findings are correct in all respects for all three years, Duke Power's return would have been below South Carolina's benchmark for 1998 through 2001 and "within a reasonable range" surrounding North Carolina's return.

The audit report named several Duke employees involved at various times in discussions regarding accounting changes, along with their positions at the time -- Rick Ealey, Duke Power's assistant controller; Sandra Meyer, Duke Power's vice president of planning and finance; Steven Young, vice president for rates and regulatory affairs; Don Stratton, manager of rates and regulatory affairs; and Jeff Boyer, Duke Energy controller.

Duke Power is the largest utility in the Carolinas, providing electric service to more than two million customers in the two states. Duke Energy is among the top 10 electric generators in the U.S.

Duke Power Profit Misstated

Associated Press by Paul Nowell October 23, 2002

Audit Shows Duke Power Utility Underreported Earnings by More Than $123 Million

(10/22/02) - CHARLOTTE, N.C. (AP) -- Duke Energy Corp.'s regulated Duke Power utility underreported earnings by more than $123 million from 1998 to 2000, according to an audit report released Tuesday. The company would pay a $25 million penalty back to customers under a proposed settlement filed Tuesday.

Duke has already agreed to the amount, which would be sent to North and South Carolina, Duke Power spokesman Tom Williams said. He did not say how much each state would receive.

The settlement, arrived at in discussions between Duke and regulators, would result in a $19 million charge against Duke Energy's fourth-quarter earnings.

As a public utility, Carolinas regulators limit Duke Power's income. If profits rise above a set return level, the states can reduce consumer rates.

A 35-page report by auditing firm Grant Thornton LLP concluded that Duke misstated $123.6 million of profits between January 1998 and July 1, 2001. The audit was commissioned by both state regulatory agencies and funded by Duke Energy.

Auditors found "a number of Duke mid- to senior level managers met and developed a plan to identify expense and revenue items which could serve as a basis for accounting adjustments which could be made to 'avoid reporting over-earnings to regulators.'"

The adjustments minimized Duke's return that was reported to regulators, but had no effect on the company's financial results that were reported to investors and the Securities and Exchange Commission.

In its response, Duke Energy said there was no intentional wrongdoing by any employees. The company said it agreed with some of the findings in the audit and disagreed with others.

The company did not admit wrongdoing in the proposed settlement, although it acknowledged its own investigation found that some accounting errors were made.

"Intent is not there," Williams said.

Jo Anne Sanford, chairman of the North Carolina Utilities Commission, said commissioners would discuss the proposed settlement at a hearing on Monday. The South Carolina Public Service Commission will have a similar hearing the next day, she said.

The 10-month audit was the result of a whistleblower's claim that Duke Power misstated its profits between 1998 and 2000. The report was based on sworn testimony by Duke employees and a review of 13,000 Duke documents.

Duke Power, the largest utility in North Carolina and South Carolina, has about 2 million customers in the region.

Duke Energy shares fell 43 cents to close at $19.65 Tuesday on the New York Stock Exchange.

Duke May Take Charge for Settlement

Reuters October 23, 2002

(10/22/02) - NEW YORK (Reuters) - Duke Energy Corp. one of the nation's top integrated utilities, on Tuesday said it could take a fourth-quarter charge to settle allegations with state regulators that its utility unit misreported profit for three years.

Charlotte, North Carolina-based Duke said would take a one-time $19 million charge in the fourth quarter under a proposed settlement agreement with the North Carolina Public Utilities Commission and the Public Service Commission of South Carolina.

An independent accounting review by Grant Thornton -- covering January 1, 1998 to July 1, 2001 -- determined that Duke underreported $124 million of profit in order to "minimize" its earned return.

Duke said it has agreed to settle the matter but noted the agreement "is not an admission with respect to any matters resulting from and within the scope of the accounting review, but made for the purpose of terminating a dispute."


CFO Magazine by Joseph McCafferty October 19, 2002

Employees who try to bring to light unethical or illegal practices by their employers are often criticized, treated like outcasts, fired, or worse.

(October 11, 2002) - Barron Stone doesn't like to be called a whistleblower. The CPA, who alleges that his employer, Duke Energy Corp., kept the price of electricity artificially high in the Carolinas with questionable accounting, says he prefers to be called an "informant." "The word 'whistleblower' has a negative connotation," he explains.

Indeed it does. Stories like that of Sherron Watkins, who has been praised for speaking out against fraud at Enron, are rare. More often, those who try to bring to light unethical or illegal practices by their employers are criticized, treated like outcasts, fired, or worse. "It almost always turns out badly for the whistle-blower," says James Fisher, director of the Emerson Center for Business Ethics at Saint Louis University. "Often they regret it. They lose their jobs, they have family problems, or they're shunted off to the side."

It's not surprising, then, that the most common reactions of those who discover dubious employer practices are to either leave or look the other way. And while the public has continually asked, "Why didn't anybody come forward?" during the recent scandals, the fact that so few did indicates that systems designed to protect whistleblowers often don't work.

Power Play

Stone's decision to blow the whistle at Duke was not an easy one: it took two years after first noticing what he calls irregular accounting entries before he came forward. "My wife was against it. She was afraid for my personal safety and the family's well-being," says the father of two. Although he says personal safety was never an issue, he was prepared for hostility. "If you go into it thinking people are going to pat you on the back, you are kidding yourself," warns Stone.

In its Duke Power unit, which runs its regulated utility business, Duke Energy is allowed to earn a maximum rate of return on electricity it sells 12.5 percent in North Carolina and 12.25 percent in South Carolina. If the company is earning more than that, regulators can cut the rate it charges to customers.

Stone alleges that from 1998 to 2001, the company reclassified some accounting items to make its returns lower so state regulators wouldn't cut rates. For example, he says Duke often gets rebates from insurers of its nuclear plants based on safety records. Although the cost of the premiums is expensed to the electricity business, he claims the rebates approximately $26 million to $30.5 million each were not booked back to the same accounts. On a number of occasions, "they were booked below the line in a nonelectric account," says Stone. The moves, he says, kept Duke Power from exceeding its allowable returns and kept the states from reducing electricity rates.

In 1999, as accounting manager at the division level, Stone concluded that he had an obligation to address the issue. "I made a strong case [that the accounting didn't comply with generally accepted accounting principles]," he recalls. But Stone's superiors said that the decisions were final. "They never offered an explanation," he says.

In 2001, Stone reported the issue to state regulators, and to company officials through an anonymous compliance channel. And while his identity was supposed to remain anonymous to his superiors, he believes the information was leaked. "You find that you are never really anonymous," says Stone.

In response, utilities commissions in the Carolinas have appointed Grant Thornton to investigate if Duke used improper accounting to artificially keep returns low. And in February, Stone, who has worked for Duke since graduating from college in 1985, was forcibly transferred to a new job that he dislikes, and downsized from an office to a cubicle.

Duke says Stone has never been treated differently because he raised the issue. "Duke has a strong commitment to maintaining an open work environment and supporting the highest business ethics," says Cathy Roche, director of external relations at Duke.

A Matter of Ethics

As bad as things have worked out for Stone, at least he still has a job. Often whistle-blowers find themselves without one, as well as without future prospects. "The kiss of death for a career is to get a reputation as someone who is not a team player," says Fisher. "And whistle-blowers usually get labeled as troublemakers."

So why do they do it? "It's very easy to say to yourself, 'The company has taken care of me; I'm not going to rock the boat,' " says Stone, whose salary and bonus of $90,000 to $100,000 has remained steady despite his job change. "But does that buy your integrity? For me it didn't."

Personal ethics and integrity are really the only incentives to come forward. That was the case with Watkins at Enron. "A number of people at Enron knew what was going on, but they were making too much money to say anything," says Watkins's attorney, Philip Hilder of Hilder & Associates, in Houston. "[Watkins] has a strong sense of obligation and duty instilled at a young age," he adds.

Still, the fact remains that whistle-blowers have limited protections. "In these situations, the company has all the power," says Fisher. "They can marshal more resources." Further clouding the picture is that from outside the firm it's often difficult to tell if an employee has purely noble reasons for stepping forward.

The Sarbanes-Oxley Act of 2002 contains a few provisions intended to better shield whistle-blowers: it creates both a private right of action and a source of criminal liability. "It broadens the scope of potential criminal liability for individuals who take action against whistle-blowers," says Gregory Keating, a partner at Boston law firm Choate, Hall & Stewart. Already, though, the White House is pushing for a narrower interpretation of the law, and many insist that the new protections aren't enough.

Fisher, for one, believes professional organizations and trade unions should take up the cause of protecting whistle-blowers. And others argue that companies should encourage those with knowledge of wrongdoing to come forward. "The goal should be to create a mechanism for getting information forward and hearing about problems," says Keating. It just might be a company's best chance to avoid becoming the next big scandal.

Joseph McCafferty is news editor of CFO.

Duke Whistleblower Explains

The Charlotte Observer October 15, 2002

My personal and professional responsibility required me to speak

(10/14/02) - A letter from Barron Stone of Rock Hill, a Duke Energy Corp. accountant who alleged to state regulators that Duke made accounting decisions that improperly reduced its reported rate of return.

Regarding "Duke whistleblower lacks credibility," (Forum, Aug. 27):

Duke Power employee Alan Dubois and I agree on this: No company better generates and distributes electricity than Duke Power Co. For 17 years I've had the privi1ege of working with the most talented engineering, financial, operational, maintenance, etc., people in the world.

Sometimes, however, ill-advised decisions by a few can overshadow the good accomplished by many. The few I refer to are senior management responsible for deciding to classify costs in a way contrary to the Federal Energy Regulatory Commission Regulations, in my professional opinion.

Where Mr. Dubois and I (and spokesmen for Duke Energy) differ is whether these decisions were honest mistakes. I'm convinced, based on the evidence I was exposed to, that the reclassifications were intentional, done to reduce regulated electric earnings Duke reported to the N.C. and S.C. utilities commissions.

As to my credibility, I would offer any Duke employee, shareholder or customer the opportunity to review the evidence placed before me and draw their own conclusions. I am confident anyone who did so objectively would have far less confidence these reclassifications were mistakes versus intentional acts, and that Duke would have acted on its own to correct them.

It is admirable to be a loyal employee, but that should never outweigh your morals/values and professional responsibilities. I asked for explanations for several actions taken, and provided support for my beliefs some reclassifications I considered contrary to FERC regulations.

My salary should buy Duke Energy my commitment to perform at a high level, but not my morals/ethics/integrity.

Duke's Code of Business Ethics states, "We all know where we want to go at Duke Energy -- we want to lead the energy industry. We also know how we want to get there -- honestly, morally and with integrity. It might not be the easiest way. But for us, it is the only way."

Duke's Code requires employees to "comply with the law and behave in an ethical manner" and "report suspected violations of this code." It also states, "If you have a question about a topic covered in this code or a concern regarding any unethical or illegal conduct, please talk to your immediate supervisor."

I raised my concerns to my supervisor, the assistant controller of Duke Power, numerous times from December 1998 to mid-2000. Additionally, I contacted Duke's Ethics Line on July 13, 2001, prior to meeting with the South Carolina's Public Service Commission on July 19.

I made five attempts to contact an external attorney Duke assigned to my report. Each time I requested for an alternate cell number to reach him in a timely manner and made clear to his assistant that I wanted to remain anonymous. She never provided the number. Duke's Code of Business Ethics guarantees my right to remain anonymous.

As a licensed CPA, I have a duty to raise moral/ethical issues. I sleep well at night, knowing I acted in accordance with my professional responsibilities and with Duke's Code of Business Ethics.

I also disagree the money involved is immaterial to Duke Energy. I quote Duke CEO Rick Priory in response to an employee's question about the potential for a spinoff of the regulated from the unregulated businesses at his August 2001 Noon Employee meeting: "Our unregulated businesses are deploying some of the free cash flow from our mature electric and pipeline businesses." Our regulated electric business has provided cash flow to finance some of our growth activities, and clearly, in the present economic climate, is a much more stable earnings stream for our shareholders.

I agree with Mr. Dubois that employees, shareholders and customers deserve an apology, but it needs to come from Duke senior management.

Duke Audit For Regulators Ready Soon

Dow Jones by Mary Ellen Lloyd October 14, 2002

(10/11/02) - CHARLOTTE -(Dow Jones)- The heads of utility commissions in North Carolina and South Carolina said Friday they've reviewed the results from an outside audit of Duke Energy Corp. ordered last year following allegations the company's Duke Power unit underreported regulated profits.

But neither official would comment on the audit's findings or recommendations, pending the public release of the final report, which is expected in the next week.

"I can't anything about it," said Gary Walsh, executive director of the S.C. Public Service Commission. "I think (the final copy) will be in my hands by the end of next week."

Robert H. Bennink Jr., director and general counsel of the N.C. Utilities Commission, also said he couldn't comment on the draft report. The public version will be filed simultaneously with both state commissions, he said.

A Duke Energy spokesman also declined to comment on the report, which investigated an employee whistleblower's complaint about accounting irregularities allegedly intended to avoid a rate review by North Carolina.

The allegations concerned shifting expenses from non-utility to utility accounts and crediting income to non-utility accounts, which the whistleblower claims had the effect of reducing regulated profit by $100 million from 1998 through 2000.

The Charlotte Observer, which reviewed the documents sent to regulators in the case, has reported that the alleged changes didn't affect shareholder profits because all income and expenses are accounted for in the bottom line.

Duke's internal investigation of the allegations last year found that of 14 accounting changes that reduced profits reported to regulators, 10 were handled appropriately. Four involved errors that at least partially inappropriately assigned costs to electric operations during 1998.

The audit, being conducted by Grant Thornton LLP, was originally expected to wrap up in June. But some of Duke's highest-ranking officials were later asked to provide depositions to auditors, and scheduling problems delayed the process, according to people familiar with the situation.

Both state utility commissions on Thursday made public decisions supporting Grant Thornton's move to disclose to the public the names of six officers and 12 non-officer Duke employees who are named in the audit. Duke had argued a confidentiality agreement with Grant Thornton precluded releasing the names of the non-officers.

Duke Audit Release is Imminent

The Charlotte Observer by Ted Reed October 12, 2002

Whistleblower prompted review

(10/11/02) - Accountants have nearly completed a 10-month audit of a whistleblower's claim that Duke Power Co. underreported $100 million in profits between 1998 and 2000.

"The report's release is imminent," Gary Walsh, executive director of the S.C. Public Service Commission, said Thursday. "I anticipate having it as a public document within the next week."

Walsh declined to comment on the audit's findings. Accounting firm Grant Thornton LLP conducted the $800,000 audit, paid for by Duke.

Last year Duke accountant Barron Strong alleged that his company intentionally misled regulators by directing about $100 million, most of it from insurance rebates, to unregulated accounts.

Duke has said repeatedly that it did not act improperly and never intended to mislead regulators, although it has acknowledged accounting errors.

Had the money been directed to regulated accounts, it could have pushed Duke's profits over the 12.5 percent rate allowed by N.C. regulators.

Duke was not as close to reaching the 12.25 percent return allowed by S.C. regulators. However, Walsh has said Duke should nevertheless have reported its actions regarding the $100 million to the commission.

It is unclear whether regulators would adjust the rates Duke charges if the audit found the company acted improperly.

On Thursday, the S.C. commission voted to deny Duke's request that the names of a dozen non-officers be left out of the report. "Duke had proposed that all non-officer names be redacted, while (accounting firm) Grant Thornton took the position that all the names should be left in the report," Walsh said.

The N.C. Utilities Commission also denied Duke's request to remove the names, said Bob Bennink, general counsel for the commission.

Duke's policy is to protect its employees' privacy, said Duke spokesman Tom Williams. "The effort to redact the names of employees who assisted Grant Thornton with the audit is consistent with that policy," he said.

Williams said a confidentiality agreement with Grant Thornton included removal of employees' names from documents provided to the firm, with a provision that disagreements would be resolved by the commissions.

Strong said he anticipates the audit will show that "Duke's actions were intentional."

Strong said he based that conclusion on questions that Grant Thornton asked him in a deposition and on Duke's efforts to set tight parameters on the investigation, including limiting the circumstances under which the firm could make copies of documents.

Duke declined to comment on the report.

Dave L'Heureux of The (columbia) State contributed to this story.

Whistle-Blowers Need Protection

Associated Press by Sam Hananel September 5, 2002

Most report employers retaliated against them

WASHINGTON - Most employees who expose workplace wrongdoing face some form of retaliation, and many still lack the legal right to protect themselves, says a report released Sunday by a whistle-blowers advocates organization.

About half the whistle-blowers who responded to a survey by the nonprofit National Whistleblower Center in Washington said they were fired after reporting unlawful conduct. Most of the others said they faced on-the-job harassment or unfair discipline.

The report recommends that Congress pass legislation to protect all government and private sector whistle-blowers from reprisals in the same way that existing laws shield victims who report discrimination based on race or sex.

"The survey shows that people who blow the whistle perceive they are being discriminated against," said Stephen Kohn, the center's board chairman. "There's a strong need for greater legal protection."

A patchwork of more than a dozen federal laws now allows whistle-blowers to fight employer reprisals in certain cases, such as airline safety and nuclear power plant violations. Legislation passed in July protects, for the first time, employees who report financial misconduct at publicly traded companies.

Workers who expose many other types of abuse remain without legal recourse if an employer decides to retaliate, the report said.

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