SARVESH [Pick the date]

SARVESH UTPAT
MMS I DIV D ROLL NO-2011238

TOPIC: NICOR

Introduction :

When Scandal Went Public

Allegations

Latest Developments

Company Comment

July 2002

Independent audit uncovered accounting problems that boosted revenue and underestimated expenses.

Nicor restated results to reflect proper accounting in the first half of this year

Our focus now is to stabilize this venture and put some certainty to its financial results. The company is evaluating its continued involvement in this venture.

About the industry :

Type

Public (NYSE: GAS)

Industry

Gas utilities

Founded

1953

Headquarters

Naperville, Illinois, USA

Key people

Russ M. Strobel, Chairman, CEO, & President

Revenue

$3.374 billion USD (2007)

Operating income

$207 million USD (2007)

Net income

$135 million USD (2007)

Employees

3,900 (2007)

Website

www.nicor.com

Nicor, Inc. (NYSE: GAS) is an energy and shipping company headquartered in Naperville, Illinois. Its largest subsidiary, Nicor Gas, is a natural gas distribution company. Founded in 1954, the company serves more than two million customers in a service territory that encompasses most of the northern third of Illinois, excluding the city of Chicago. Nicor has 32,000 miles (51,000 km) of pipelines. Nicor's next largest subsidiary is Tropical Shipping. Headquartered at the Port of Palm Beach, Florida, Tropical Shipping is one of the largest containerized cargo carriers in the Caribbean region and the Bahamas. Tropical Shipping operates a fleet of 11 owned vessels and also charters a number of vessels to provide flexibility as market conditions change. The company serves ports in the Bahamas, Virgin Islands, Cayman Islands, Dominican Republic, Eastern Caribbean and the Guianas.AGL Resources announced its acquisition of Nicor in December 2010.

Consumer Services

Warranty and Protection

Business to Business

Nicor Advanced Energy Offers energy plans to manage natural gas bills. Nicor Solutions Offers levelized billing plans to help manage your natural gas bills. Nicor Home Services Offers HVAC, insulation and other in-home services. Nicor Home Solutions Conveniently protect your biggest investment your home - from expensive repairs. Nicor National Provides attractive energy efficiency and warranty solutions to utility partners and their customers. Nicor Enerchange Helps Commercial and Industrial companies manage their natural gas needs. Chicago Hub Services Offers customers alternatives in natural gas transportation and storage.

Commercial and Industrial

Shipping

Tropical Shipping One of the largest containerized cargo carriers in the Bahamas and Caribbean region.

What went wrong ?

A joint venture between Nicor July 2002. Independent audit uncovered accounting problems that boosted revenue and underestimated expenses. None Nicor restated results to reflect proper accounting in the first half of this year. Our focus now is to stabilize this venture and put some certainty to its financial results. The company is evaluating its continued involvement in this venture.

on Aug. 9, 2007 ,The Securities and Exchange Commission announced the filing of a civil injunctive action against former senior officials of Nicor, Inc., a major Chicago-area natural gas distributor, alleging financial fraud lasting from 1999 to 2002. The SEC's complaint alleges that former Chairman, CEO and President Thomas Fisher, former CFO and Executive Vice-President Kathleen Halloran, and former Treasurer and VicePresident George Behrens engaged in or approved improper transactions, and misrepresented Nicor's gas inventory in order to meet earnings targets and increase the company's revenues under a performance-based utility rate plan.

Linda Thomsen, Director of the Commission's Division of Enforcement, said, "This action against three senior officers of Nicor demonstrates the Commission's continued commitment to holding individual decision makers accountable for their conduct when it results in fraudulent financial statements."

Merri Jo Gillette, Director of the Commission's Chicago Regional Office, added, "Fisher, Halloran and Behrens engaged in a scheme to manipulate Nicor's earnings through fraudulent transactions and mislead investors by making improper disclosures regarding Nicor's financial performance. This case, like others, shows that the Commission will not tolerate accounting ploys and misleading disclosures by senior officers who are intent on making their numbers."

The complaint alleges that in 1999, Fisher, Halloran and Behrens participated in devising a method by which Nicor could profit by accessing its low-cost last-in, first-out (LIFO) layers of gas inventory. As a result, the former officers engaged in or approved improper transactions, and made material misrepresentations in financial statements and documents filed with the Commission. They also failed to disclose material information regarding Nicor's rigged reductions in gas inventory levels that enabled it

to improperly manipulate its earnings and to increase Nicor's revenues under a performance-based utility rate plan. In addition, the former officers materially understated Nicor's expenses during the first and second quarters of 2001 by improperly bundling a weather-insurance contract with an agreement to supply gas to Nicor's insurance provider at below-market prices. Moreover, they caused the losses on the supply agreement with the insurance provider to be improperly charged to Nicor's utility customers. These improper transactions enabled Nicor to understate its expenses and to manipulate its earnings to achieve its earnings targets. As a result of the manipulative scheme, Nicor materially overstated its reported income for the years ending 2000 and 2001, and for each of the quarters within those years and the financial statements filed with those reports.

Additionally, the former officers failed to make disclosures required by GAAP about the effects of LIFO inventory liquidations on Nicor's reported income. Nicor, through Fisher, Halloran and Behrens, failed to disclose in either the Management's Discussion & Analysis section of its 2000 and 2001 annual and quarterly reports, or in financial statements filed with those reports, that it had recorded material increases to income resulting from the liquidation of its LIFO inventory, and that the continued liquidation of Nicor's low-cost inventory was not sustainable.

On March 29, 2007, Nicor consented to the entry of a court order enjoining it from violating the antifraud and reporting provisions of the federal securities laws and ordering that it pay a $10 million civil penalty (LR-20060).

The Commission's action seeks injunctive relief, disgorgement, civil penalties, and officer and director bars against Fisher, Halloran and Behrens.

Implications :
Nicor Gas has refused to provide evidence to back up an independent report that cleared the utility of fraud, the Citizens Utility Board alleged on Monday.

"Given the alleged improprieties regarding a public utility, they should be bending over backwards to cooperate; instead they are playing hide-the-ball," said Robert Kelter, CUB's director of litigation. In a filing with the Illinois Commerce Commission, the advocacy group asked the agency to force Nicor to answer questions about the report, which also suggested that, despite numerous "improper" accounting methods used by the company, consumers still may end up owing the company money.

The ICC has postponed further action in the case while it considers CUB's request.

The gas company, a unit of Naperville-based Nicor Inc., has been under investigation by the Securities and Exchange Commission and the U.S. attorney's office since a whistleblower last year alleged that the company had engaged in fraudulent accounting in its unique natural gas purchase plan.

The report by former U.S. Atty. Scott Lassar, filed with the SEC in October, concluded that Nicor had not committed fraud in connection with its performance-based rate plan, for which the company earned a $27 million profit.

The plan, designed to stimulate Nicor to buy the cheapest gas possible for consumers, allowed the company to split savings it made on gas purchases with consumers.

Instead of using sophisticated financial instruments to hedge gas, the company used accounting techniques to tap into an inventory of cheaper gas. Purchased for 3 cents a therm, the gas had been on its books from the 1950s.

As a result of the Lassar investigation, the company was forced to correct the "improper" way it accounted for the gas purchases.

Under the revised accounting scenario, Nicor didn't tap the cheaper, 3 cent-per-therm older inventory and instead used far more expensive gas.

Lassar's report raised the possibility that consumers might owe Nicor money for the accounting reversal. "Correcting the accounting for this means that ratepayers would have been undercharged for actual costs," the report said.

For other errors, including other accounting and meter reading errors, the company said it would refund roughly $15 million, or about $7 for an average residential customer.

CUB fired off a series of questions concerning Lassar's conclusions, which largely were rebuffed by Nicor attorneys.

In some cases, the company's attorneys argued that they had already answered the questions. In other cases, they argued that Lassar, who is a witness in the case, can't be forthcoming because of attorney-client privilege. Robert Kelter, CUB's director of litigation, said, "Nicor served us with thousands of pages of documents that are not identified in any way, that don't allow us to figure out how Lassar reached the conclusions in that report.

"They are hiding behind attorney-client privilege when Lassar was supposed to be an objective investigator making the report, not providing legal counsel to the company," Kelter said.

Nicor serves more than 2 million natural gas customers in the northern third of Illinois.

Recommendations:
To avoid the fraud company should take the following measures: Safeguards over assets - securing physical assets, access to data, and money Segregation of duties - dividing activities so one employee doesn't have too much control over an area or duty Proper authorization of transactions - ensuring that employees aren't exceeding their authority Independent checks on performance - using audits, surprise check-ups, inventory counts, or other procedures to verify compliance with policies and procedures, as wel Monitoring activities - monitoring access to assets, data, and the accounting system.

Also company should conduct Comprehensive Fraud Prevention Program which includes: Fraud education: Teaching employees about fraud risks Fraud investigation: Investigating instances of suspected fraud Fraud prevention: Evaluating, designing, and implementing controls that proactively prevent fraud.