NEW YORK — When Tim Faraone invested in computer-card maker Centennial Technologies Inc., he thought he had made a safe bet.
His broker had pumped the stock as a solid buy. Its financial statements appeared in good order. There was talk about its future growth possibilities.
But safe bet soon turned into financial disaster almost overnight. Faraone, owner of a North Providence, R.I., cleaning company, lost about $24,000 when Centennial's stock plummeted amid allegations that it had overstated sales and profits.
"I felt assaulted, victimized, and most of all, powerless," said Faraone, 43, who is still haunted by his losses four years later. "I couldn't believe that any company could lie like that."
Faraone's story isn't a rarity. In fact, millions of investors in recent years have watched their fortunes evaporate as a result of corporations playing tricks with their books.
More than ever before, corporate executives are under intense pressure to deliver rising sales and profits, and those that do are rewarded with big stock gains and bonuses.
But increasingly companies manipulate their numbers. Some of them blatantly break the law, while others jigger their finances in questionable yet legal ways.
"Often these companies find themselves in the position of having sales that are not what they think they should be, so they attempt to use some creative methods to create sales," said Philip Wolitzer, an accounting professor at Long Island University. "In many cases, it is hard at first to even detect that they've done something wrong."
There are growing concerns that the nation's economic downturn is compelling companies to aggressively seek out ways to make their financial statements look better than they really are.
Just this year, dozens of companies have been caught in the act. Among them:
Xerox Corp. restated earnings after admitting that it did not properly follow certain accounting rules at a Mexican division.
ConAgra Foods Inc. reduced earnings by more than $100 million after discovering fictitious sales and earnings at one of its subsidiaries.
Kroger Co., the giant supermarket chain, revised down its earnings for 1998-2000, saying executives at its Ralphs Grocery subsidiary conspired to hide cash from auditors and senior management.
Accounting manipulation has become so prevalent that lawmakers in Washington are considering hearings on the issue, while the Securities and Exchange Commission has seen a sharp rise in the number of companies under investigation.
"There is a big question looming out there: Why is there such a massive deterioration in accounting practices, and can it be stopped?" said Joseph Carcello, an accounting professor at the University of Tennessee.
Last year there were 156 financial restatements, up from 150 in 1999 and 91 in 1998. The restatements in the past three years add up to more than the combined total for the previous eight years, according to the Financial Executives International, a group based in Morristown, N.J., that represents senior corporate financial officers.
About $31.2 billion in market value was wiped out following restatements, as investors sold stock in such companies, according to FEI.
Many companies claim restatements don't mean they have broken any rules, saying that accounting standards are open to interpretation. Often courts are left to decide whether laws were violated.
Most problems stem from how revenue is counted. Corporations can falsely boost sales figures by recording revenue before delivering products or asking customers to receive goods before they need them. Sometimes they will claim sales before the goods are sold at all.
"There is not a 'one-shoe-fits-all' mentality that works in accounting," said Mary Ellen Carter, assistant professor of accounting at Columbia University's Graduate School of Business. "Management is in the best position to know what accounting choices capture their business, . . . but they also know what accounting choices don't."
Companies hire outside auditors to verify their financial statements, mainly to check if accounting standards are met. Yet accounting firms are known to overlook irregularities, sometimes in an attempt to hold on to their audit contracts and more lucrative consulting services for the same companies.
In June, accounting titan Arthur Andersen LLP agreed to pay a $7 million civil fine to settle federal allegations that it issued false and misleading audit reports for Waste Management Inc. from 1993 to 1996 that inflated the trash hauler's profits by more than $1 billion. Andersen neither acknowledged nor denied the allegations.
"There is supposed to be checks in the system that prevent management from being able to do such things, but it is clear that the checks have eroded," said Michael Lange, a partner in Berman DeValerio Pease Tabacco Burt & Pucillo, a Boston law firm that handles investor lawsuits.
At Centennial Technologies, top executives fabricated sales of "Flash 98," a nonexistent product, to friends of former CEO Emmanuel Pinez. The company also created false sales records by shipping fruit baskets to Pinez' friends and recording the shipments as $2 million in revenues.
The maneuvers made it look like Centennial made a profit of $12 million in 1996, when in reality the company lost $28 million.
Based on the earnings reports, shares of Centennial increased 450 percent in 1996 to $55.50 a share. Faraone managed to get in at $46 a share, but after the fraud was uncovered in early 1997, the stock plunged to $3.
Last year, Pinez was convicted in federal court, and sentenced to five years in prison and a $150 million fine.
Other companies — blue-chips and startups — have employed similar schemes.
Sunbeam Corp. and its former CEO Albert Dunlap are accused of creating the illusion of a speedy turnaround after he arrived at the company in 1996. An SEC lawsuit filed in May alleges that the company shifted revenues to inflate losses under the old management and added the sales back to inflate income under Dunlap.
The lawsuit also charges that Sunbeam offered discounts to customers that stocked up on merchandise months ahead of schedule, but failed to disclose that such revenue would hurt future results. Dunlap has denied the allegations.
Xerox, the troubled business machine maker, restated earnings from 1998 to 2000 in May after acknowledging that its Mexican subsidiary improperly booked sales and hid bad debts. Questions over its accounting practices helped push its stock down more than 60 percent in the last year.
ConAgra, whose brands include Bumble Bee tuna and Butterball turkeys, said in May that falsified sales at its United Agri Products Cos. subsidiary would force it to lower earnings from 1998 to 2000 by about $123 million. The company and the SEC are informally investigating the accounting practices.
Last month, software maker AremisSoft Corp. announced it was cooperating with a SEC probe into unaccounted-for revenues. The company claimed $7.1 million in sales to the Bulgarian government last year, but auditors have confirmed receipt of only $1.7 million.
The SEC has become increasingly aggressive in its crackdown against alleged offenders. About 260 investigations are now under way, a substantial jump from years past.
Lawmakers are also expressing concern about accounting fraud. Rep. Richard Baker, R-La., chairman of a House subcommittee on capital markets, said last month that he may call hearings on the issue.
There's also been a rise in the number of shareholder lawsuits. A recent study by the audit and consulting firm PricewaterhouseCoopers found that of the 201 class-action federal and state lawsuits filed against corporations in 2000, some 53 percent contained accounting allegations. That's up from less than 40 percent in 1995.
"The spectrum of lawsuits goes across all industries, and all sizes of business" said Harvey Kelly, partner in the corporate investigations practice at PricewaterhouseCoopers. "It shows that no one is immune to these kind of challenges."
Faraone joined a class-action lawsuit against Centennial, never expecting to see any of his losses returned. A settlement of the case in 1998 got him 666 shares back, then valued at about 50 cents each, and he sold them immediately.
The company, however, was bought this year by Solectron Corp. for $108 million. Centennial stockholders collected $13.79 for every share they owned. If Faraone had waited, he could have recovered nearly $9,200.
He, however, has no regrets about selling the stock.
"This company did me wrong in a sneaky way," he said. "I wasn't willing to take any more chances."