Outback CFO Merritt Explains Why He Abruptly Resigned

Back in April, Outback Chief Financial Officer Robert Merritt surprised his fellow executives, company employees, Wall Street, and other finance executives when he announced at the end of a routine earnings conference call with analysts that he would retire on May 27, citing what he called "recent lunacy over lease accounting.”

Calling the situation a "fiasco," Merritt noted that more than 150 companies have recently restated their results for accounting issue, adding, "Reaction from the media that these companies are run by crooks who were cooking the books is disturbing." For the record, others put the number of companies that have restated results stemming from the lease accounting issue at 200.

Meanwhile, last week Compliance Week reported that in April, more than 22 percent of internal control disclosures over internal reporting were related to leasing issues, the most common cited reason for that month.

Whatever the case, this is a critical issue facing CFOs and other finance executives these days.

In an exclusive interview with Compliance Week, Merritt, who joined Tampa, Fla.-based Outback in 1990, said that the lease accounting issue was not the sole reason he resigned, but rather the regulatory demand that broke the finance executive’s will.

“I’ve been thinking about it since last year,” concedes Merritt, 53, who until now has remained publicly silent since his initial announcement. “I thought about it on and off for the better part of a year. I was in a position to retire. I thought it was a good time.”

Merritt no doubt knew he was sitting on a treasure trove of stock options. This year alone, he has made more than $11 million from exercising options and then selling the stock, mostly since he made his retirement announcement. “I’m in a position where I don’t need to go to work,” he adds.

"Reinterpretations Of Reinterpretations"

Elaborating on the lease accounting issue, Merritt, a one-time auditor with PricewaterhouseCoopers, said, in effect, that it was an issue that seemingly took on a life of its own.

For one thing, he wanted to set the record straight that it is a misnomer that it was the SEC that triggered the recent wave of restatements and revisions of financial statements. “The SEC issued a letter reiterating long-standing views,” he explains.

Rather, he asserts it was touched off by KPMG, when it “reinterpreted its views of the measure time of leases” and had clients restate.

“Then they [the accounting firms] all seemed to outdo each other with reinterpretations of reinterpretations,” Merritt insists. “With each successive view, each firm became even harsher on the financial results of companies.”

He cites, for example, the treatment of certain costs when new restaurants are being built. He says there is one interpretation that some of the costs during the construction period should be deemed to be related to rent and therefore should be expensed, which take a big hit to current earnings.

The trouble is, all other costs during the construction period are capitalized. Merritt and many others argued that this create an inconsistent application to costs during construction.

Eventually the rent-expense requirement was overruled, he adds. “It may not be the preferred method, but it was acceptable,” he allows. Yet, this led to another wave of restatements.

In the case of Outback, the restaurant chain only restated once.

Certification Overkill

The lease accounting issue, however, was just the last of a series of frustrating accounting-related challenges.

Merritt also decreed what he calls “the overkill of 404 certification” and its impact on his staff of 200 to 250 people. He says it has required significant man hours in the mad rush to meet the SEC’s deadline for compliance. “It has had an impact on virtually every person who works in the financial accounting area,” he laments, including the entire internal audit group.

And, of course, his own time, which he says he cannot quantify. “It is not just how much time spent, it’s the unproductive time,” he adds. “It’s time and resources. It’s difficult to explain—it’s not the regulations—but how to get there and whether there is value.”

Like what? He says he doesn’t want to get into details. “It’s not something I want the regulatory world or lawyers sniffing around.”

He explains, though, that he is more frustrated with the way the new law has been interpreted and implemented, such as the requirements of Section 404. “If you read 404, it doesn’t sound particularly onerous,” Merritt insists. “The way the regulations are written by PCAOB, it is onerous.”

For example, he says a large amount of time is spent around computer controls and systems. But, he asserts that the corporate frauds at Enron, WorldCom and others that spawned the landmark legislation in general did not involve problems with computer systems and passwords at all. This, of course, has been a point of frustration for many public companies, and many of the comment letters submitted to the SEC on SOX 404 were focused on this very issue.

Life's Too Short

So, how did his seemingly abrupt decision sit with his boss and colleagues? According to Merritt, they were very supportive.

Merritt says he and his chairman, Chris Sullivan, had many conversations about his level of frustration and what he calls the apparent arbitrary way accounting matters are handled. “He was probably equally frustrated,” Merritt adds.

Like the certification requirements? No. Merritt strongly supports this provision, which demands that the CFO and CEO assert that the financial statements are correct. And he also thinks it’s a good idea to require CEOs to sign off as well, so they don’t claim ignorance.

He also approves of the changes being made to the boards of directors, especially the increase in independent members. Merritt also likes the idea that independent board members should meet once a year without management and insiders. “Maybe they could have gone further [on this requirement],” he adds.

But, in the end, does he expect Sarbanes-Oxley to prevent more frauds? No, says Merritt. “Thieves are thieves.”

As for "what's next," Merritt simply says he’ll find something to do.

“I have more to do with my life,” he stresses. “Life’s too short to just spend it on treading water. It’s particularly difficult to go down the hall and explain to other executives that what we have to do I don’t agree with.”

It helps, of course, that he can easily finance his new lifestyle.