By George Mannes
Senior Writer
06/18/2002 07:09 AM EDT

The cable industry is trying hard not to get splattered with the mud flung at Adelphia Communications (ADELA:OTC BB - news - commentary - research - analysis). But investors still see spots everywhere.
In the wake of disclosures of inaccurate accounting at Adelphia, at least three publicly traded cable TV operators reached out to Wall Street last week to say they don't engage in suspect accounting practices. The companies, among the industry's biggest players, insist they've got no nasty surprises hidden in their financial statements.

But investors, feeling burned by suspect accounting in the telecom industry and in energy trading, have decided that the cable industry's numbers aren't as trustworthy as they used to be. And that's meant very bad things for a sector whose largest operators have lost between 30% and 70% of their value this year -- with no particular relief in sight, observers say.

The accounting practices disclosed in an Adelphia filing at the Securities and Exchange Commission early last week "are not widespread," says Michael Willner, CEO of cable operator Insight Communications (ICCI:Nasdaq - news - commentary - research - analysis) and chairman of the National Cable and Telecommunications Association, the dominant cable TV industry trade group. But, he acknowledges, there's a "widespread flu" among cable TV operators "because there were some accounting practices in other industries -- in particular I'm thinking of the telecom industry -- which we are not even similar to."

Different This Time?
Certainly, the accounting issues troubling other industries haven't been limited to single companies. Multiple telcos have engaged in questionable capacity swaps, trading similar amounts of fiber-optic usage rights in transactions that critics say inaccurately boosted revenue and capital expenditures.

Meanwhile, Enron wasn't the only energy trader to engage in tit-for-tat transactions in which the only apparent benefit was to increase revenue and inflate companies' reported amounts of trading volumes.

But Adelphia, insists the cable industry, is different.

"This is a case where we have a very unique situation in one company that was reporting certain ways I don't think you're going to find any of the others doing," says Willner.

In Adelphia's June 10 filing, the company's current management outlined several "erroneous" or insufficiently conservative practices through which it said the previous management overstated revenue and inflated earnings before interest, taxes, depreciation and amortization. EBITDA -- a common bottom-line yardstick often used as part of cable stock valuation -- was overstated by 15.3% in 2000 and 17.5% in 2001, according to Adelphia's new crew.

Insight was one of several companies last week seeking to differentiate between its accounting practices and Adelphia's, though Insight's conference call with investors indicated the extent to which accounting judgment, good or bad, affects cable operators' bottom lines.

Insight and cable operators Cablevision Systems (CVC:NYSE - news - commentary - research - analysis) and Mediacom Communications (MCCC:Nasdaq - news - commentary - research - analysis) deny, for example, that they receive "marketing support" payments from vendors of set-top boxes. Adelphia said last week that as early as 2000, the company received such marketing support payments from cable box suppliers that canceled out a price increase Adelphia paid for its set-top boxes. The effect of these transactions, says Adelphia, was to overstate capital expenditures, improperly reduce operating expenses and inflate EBITDA by $54 million in 2001 alone.

Additionally, say Insight, Cablevision and Mediacom, they don't capitalize the cost of either disconnecting or reconnecting subscribers. In contrast, Adelphia says that in the past it improperly capitalized certain expenses such as those associated with reconnecting disconnected subscribers and operating customer service centers. Like the marketing support payments, Adelphia's practice apparently helped understate operating expenses and overstate EBITDA, by perhaps $40 million in 2001.

Gray Areas
However, Insight, in its conference call last week with investors, indicated that, as is the case with other cable operators and other industries, the task of classifying expenditures as operating expenses or capital expenditures isn't cut and dried. As is the case with other cable operators, Insight's technicians out in the field may spend part of their day installing a home's first cable connection -- in which case parts and labor would be counted as capital expenditures -- and part of their day reconnecting cable-equipped homes for new service, in which case parts and labor would be operating expenses.

What Insight does, explained executives, is allocate labor costs on the basis of the company's determination of how much time is spent on new connections as opposed to reconnects; 20% of connections are new connections, Insight says. Taking into account the additional labor involved in upgrading the company's systems, about 35% of technical labor costs over the past three years have been capitalized, including $48 million in 2001. Those numbers, Insight emphasized, did not include call-center labor or other nontechnical labor.

To be sure, the degree to which the cable industry's woes are due to Adelphia's accounting blowback rather than other factors is difficult to sort out.

Cable system valuations comprise two basic elements, says John Sanders, principal of Bond & Pecaro, a Washington, D.C.-based consulting firm specializing in the appraisal of media and communications businesses. One part of the valuation, says Sanders, relates to the here-and-now of a cable system's condition and finances; the second part relates to expectations of future revenue and revenue growth.

"It's difficult at this point to dissect precisely how much of the behavior of the cable stocks is attributable to reporting isssues, and how much [is attributable to] the growth outlook," he says.