Hard look / The reality of Comverse

The big question that arose as the full extent of Comverse's accounting malpractice has emerged is this: To what extent are the figures it's been reporting over the years true?

The "flagship of Israeli high-tech" label that Comverse acquired has long since turned into a cliche. But high-tech veterans remember the days when its building in Ramat Hahayal truly symbolized something - when going to the company's complex for a job interview aroused respect. In contrast to all those fresh-faced start-ups whose future was still hypothetical, Comverse was a real company that had made it.

	Kobi Alexander, in exile in Windhoek, Namibia.
	Photo by: Bloomber

But in recent weeks, as it has emerged that Comverse managed to spend half a billion dollars on accountants in the space of four years, one has to wonder whether the company's whole history was a figment of its accounting practices.

If the accounting fraud at Comverse was not confined to backdating stock options, but also affected declared income, profits and all the company's other data, then what was the actual meaning of the $3 billion market cap the company boasted five years ago (which is three times its current valuation )?

A different era in accountancy

Comverse was founded and built in a different accounting era - before the accounting scandal at Enron burst on Wall Street, ushering in a new era in U.S. accounting rules, and before global finances imploded in late 2008 and hung another long series of regulations around corporate necks like yokes. The mores of those times don't excuse the criminal accounting practices by Comverse's senior management, but they explain some of it.

Still, the fact that the company spent NIS 2 billion on lawyers, accountants and consultants - money that could have been spent on development and growth - once more begs the question of whether the change in accounting standards and regulation has not gone too far.

Comverse's story today is also one of the fear gripping its accountants and directors. With former Comverse CEO Kobi Alexander residing in Namibia to evade the long arm of the American law, the company's accountants are in no hurry to sign off on the reports. In fact, it has not filed any since the backdating scandal exploded four years ago.

Cold feet

The $500 million Comverse spent on its financial reports went to a number of advisory bodies, including Deloitte for accounting matters, Ernst and Young for tax advice, and PricewaterhouseCoopers for help in preparing its financial reports. All made vast sums from the Comverse affair.

Wall Street companies regularly issue reports without employing the accounting staff hired by Comverse. The normal cost of putting out financial reports for a company like Comverse runs to $6-7 million per quarter. How has its preparation of reports dragged on for four years, at a cost of $500 million? No explanation could possibly hold water.

Why didn't a strong individual take charge, stand up to the hordes of accountants and give them a deadline to sign the financial statements? One of Comverse's problems is the absence of a strong boss. Public control of the company is apparently a major problem.

The company's board, which has changed several times, has experienced internal strife in the past, and its members fear signing the reports themselves. The chairman of the company's audit committee used to be a senior partner at accountancy firm KPMG and is particularly sensitive on this score, and everyone gets cold feet around accountants. Thus the company's senior managers are themselves one of the central causes of the delay.

A forceful owner with a controlling interest would never have let such a thing happen to his company.

Catalog of waste

Comverse's list of expenses explains how it managed to squander billions of dollars in recent years. In round numbers, the list includes $500 million to accountants and attorneys; $400 million on repurchasing convertible bonds from investors when they exercised their option to convert them; $300 million on buying shares of subsidiary Verint Systems; a $65 million charge on a dividend paid by its subsidiary Ulticom; $20 million paid in compensation for a patent violation; $130 million to acquire other companies; $230 million spent when the company relisted its subsidiaries Verint and Ulticom for trade on the stock exchange and then had to present their cash holdings separately; and finally, the settlement with investors who filed a class action against the company and won $165 million.

Incidentally, Comverse nevertheless achieved positive cash flow during these two years - of over $100 million.

At the end of the above laundry list comes $10 million spent on compensation to dismissed employees. Though this is a small item, it reflects the price paid by the really big losers in the Comverse affair - the employees at the bottom of the pyramid.

'Danger ahead'

In the world of Israeli high-tech, people always complain that big companies fail to grow, while the startups that could have driven Israeli economic growth are sold to multinationals before they mature. Comverse was a model of a company that did something else. It almost fulfilled its dream of becoming a global company, employing multitudes of Israelis.

But Comverse also reminded people that Israeli chutzpah, which helps startup entrepreneurs make breakthroughs, is also an accident waiting to happen in a large, orderly company expected to meet international standards. Comverse is thus a "danger ahead" sign for Israelis trying to build a big company: What's good for a startup working against the clock in order to grow quickly, gain a foothold and gain market share is not necessarily good for the long term.