AFL-CIO demands Sprint replace its independent auditor

Amy Shafer

Thursday, March 27, 2003 | 9:54 a.m.

KANSAS CITY, Mo. -- The AFL-CIO on Wednesday asked Sprint Corp. to appoint a new independent auditor, claiming Ernst & Young compromised its independence by selling questionable tax shelter advice to Sprint's top two executives.

The AFL-CIO also promised to launch a campaign urging shareholders to vote against the reappointment of Ernst & Young should Sprint fail to put forward a new auditor at its annual shareholder meeting in May.

The AFL-CIO said it is trying to protect the pension plans of union members. It estimates that worker pension funds own about 16.45 million shares of Sprint stock.

"We feel that replacing the auditor is the predicate to restoring investor confidence in the company," said William Patterson, director of the AFL-CIO's investment office.

William T. Esrey, the former Sprint chief executive who was replaced last week by Gary Forsee, and Ronald T. LeMay, the Overland Park, Kan.-based company's chief operating officer, have both acknowledged they are being audited by the IRS. They could face tax bills in the millions if the tax strategy recommended by Ernst & Young is disallowed.

Sprint, the main local phone company in Las Vegas, said it stood behind its auditor.

"The firm has maintained its independence," spokesman Mark Bonavia said. "If it couldn't continue to do that we'd make a change."

A spokesman for Ernst & Young did not return phone calls seeking comment Wednesday, but the firm has defended its work as legal.

The tax shelters were designed to allow Esrey and LeMay to defer taxes on gains from the accelerated vesting of their stock options after shareholders approved a merger with WorldCom Inc. in 2000. Regulators eventually blocked the WorldCom deal.

In a letter Wednesday to Irvine O. Hockaday Jr., the lead independent director of Sprint's board, Richard L. Trumka, secretary-treasurer of the AFL-CIO, said Sprint paid Ernst & Young $5.8 million for the creation of the tax shelters, $5.1 million for audit-related services and $8.4 million for other services.

"Ernst & Young received more income from the Company in 2000 as a result of its tax evasion advice than it did from auditing Sprint's books ... We believe this unbalanced fee structure compromised Ernst & Young's independence," Trumka wrote.

Shares of Sprint FON, the company's wireline stock, closed Wednesday at $11.90, down 24 cents. Sprint's wireless stock, PCS, closed at $4.38, up 11 cents.

Jeff Kagan, an independent telecommunications analyst in Atlanta, said there were "clearly conflicts that compromised the senior executives" and cost shareholders as Sprint's stock price fell. But Kagan said he was not sure replacing the auditor would fix the problem.

"I'm not sure if their (the AFL-CIO's) solution is the right solution, but I applaud and admire their willingness to jump into something that's important to their members," Kagan said.