Donald V. Watkins
How The Southern Company Cooked Its Books In A Massive $27 Billion Accounting Fraud Scheme
Updated: Apr 3
By: Donald V. Watkins
Copyrighted and Published on March 31, 2023
[Author's Note: This is a three-part special investigative report. It is based on Southern Company documents in the public domain, confidential "insider" sources, and secret company documents. Additionally, an article in the Journal of Forensic and Investigative Accounting (Vol. 15: Issue 1, January-June 2023) by Amanda M. Grossman, Steven D. Grossman, and D. Larry Crumbley describes a multibillion dollar Southern Company fraud scheme that was perpetrated by the utility giant in connection with the construction of and cost overruns associated with its Kemper County, Mississippi "clean coal" power plant. That article is worth reading, as well.]
Part 1, What Drove the Southern Company’s Need to "Cook the Books"?
For the purposes of illustrating the Southern Company’s massive, multi-year, $27 billion accounting fraud scheme, I have selected the last full year that the company filed 10-Qs (which are quarterly reports) and a 10-K (which is its annual report) with the U.S. Securities and Exchange Commission (SEC).
The Southern Company is a Fortune 500 company that trades on the New York Stock Exchange under the ticker symbol, "SO."
The Southern Company’s 10-Q and 10-K filings for 2022 present a consolidated financial statement for the parent company and the following affiliates: Alabama Power Company, Georgia Power Company, Mississippi Power Company, Southern Power Company, and Southern Gas Company.
In addition to Southern Services Company, Inc., and Southern Nuclear Power Operating Company, Inc., the Southern Company operates two other non-registrant business units that are ancillary participants in its accounting fraud scheme. These two business units -- Power Secure and Southern Linc -- are implicated in the fraud scheme. (See, 10-K, p. II-15).
Southern Company's Form 10-K for 2022 is a Trojan Horse for Accounting Fraud
In this series of articles, we will focus on the annual report for 2022, which is called a Form 10-K. Filed on February 15, 2023, this 10-K is a Trojan horse for the Southern Company’s accounting fraud scheme.
It should be noted that the Southern Company paid Deloitte & Touche, via its affiliates, at least $17,245,000 in 2022 to audit its financial books and records. (See, K-10, p. III-2). Deloitte & Touche reported no disagreements with the Southern Company regarding accounting and financial disclosures. (See, 10-K, p. II-256). Apparently, Deloitte & Touche was not looking to bite the hand that was feeding it since they actually certified the phony numbers in the 10-K as fair and accurate.
Deloitte & Touche had the responsibility for detecting fraud within the 10-K. The existence of accounting fraud is a "material" fact, which must be disclosed. The auditing firm claimed that "the financial statements [in the 10-K] present fairly, in all material respects, the financial position of Southern Company as of December 31, 2022 and 2021." See, 10-K, II 72-75.
Deloitte & Touche also opined that: "Southern Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013)
issued by COSO."
“A matter is ‘material’ if there is a substantial likelihood that a reasonable person would consider it important…The omission or misstatement of an item…is material if, in the light of the surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable person relying upon the report would have been changed or influenced by the inclusion or correction of the item.” U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 99 – Materiality, 17 C.F.R. §211, Sbpt. B (Aug. 12, 1999).
Furthermore, the Southern Company set a threshold of $1 million or greater for determining whether its financial exposure or expenditures were "material."
Neither Deloitte, nor Southern Company, explained in the 10-K how Deloitte & Touche audited vendor payments in excess of $1 million in cases where the contracts were secret, the deliverables were maintained off-site, the vendor payments were made without invoicing, and the contractual services were continuously renewed or otherwise extended through 2022.
Likewise, neither Deloitte, nor the Southern Company, has ever explained or disclaimed the fraud scheme that was detailed in notes made by vendor Joe Perkins below on April 6, 2017. These notes recorded an off-site meeting between a Southern Company senior management executive and a longtime vendor of the company. The fraud discussion captured in these notes has NOT been reported in any 10-Q or 10-K from 2017 going forward.
Yet, the Perkins notes point the finger directly at the "bad decisions at SO"and the failure of the board of director's Audit Committee to properly monitor and audit the Southern Company's construction cost overruns for the Kemper and Vogtle projects that eventually totaled more than $27 billion in the aggregate by 2022.
According to confidential "insider" sources, these notes were withheld from Deloitte & Touche, even though they were "material" to the 10-Ks for 2017 and each successive year.
Additionally, the Southern Company's 10-K for 2022 continues a years-long pattern and practice of intentionally misclassifying millions of dollars in vendor payments to hide money laundering for legally impermissible activities and special clandestine work orders that violate company operational policies, as well as the Code of Ethics cited in the 10-K, at p. III-1.
Again, neither the Deloitte & Touche audit, nor the Southern Company's 10-K for 2022, address the nature, scope, or need for these multimillion dollar clandestine expenditures in any section of the 10-K. The Southern Company could have identified and properly classified these expense payments, but the company elected to conceal them from its auditors, shareholders, investors, lenders, and regulators.
The shady scope of work performed by the Southern Company's longtime vendor (Joe Perkins d/b/a Matrix, LLC, and Perkins Communications, Inc.) for NextEra Energy (NEE) and Florida Power & Light (FPL) caused these publicly traded companies to issue a joint 8-K on January 25, 2023 that stated: "Allegations of violations of law by FPL or NEE have the potential to result in fines, penalties, or other sanctions or effects, as well as cause reputational damage for FPL and NEE, and could hamper FPL’s and NEE’s effectiveness in interacting with governmental authorities.”
The Southern Company never issued a similar 8-K, even though this vendor performed comparable services for the Southern Company and its affiliates.
Based upon my review of these 10-Ks and 10-Qs and my personal experience in the HealthSouth accounting fraud case, all of the 10-Qs and 10-Ks filed by the Southern Company in the past 5 years reek of accounting fraud. These SEC filings will need to be amended and restated.
The Sarbanes-Oxley Certifications
The Sarbanes-Oxley Act of 2002 is a law the U.S. Congress passed on July 30 of that year to help protect investors from fraudulent financial reporting by corporations. It requires the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) of Southern Company, Alabama Power Company, Georgia Power Company, Mississippi Power Company, Southern Power Company, and Southern Gas Company to file a certification with their jointly-filed 10-Qs and 10-Ks that includes the following statements:
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; ……
The registrant's [CFO] and [CEO] have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors [Deloitte & Touche] and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): ...... (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
The individuals who signed these certifications on the Southern Company’s 10-K for 2022 are: (a) Thomas A. Fanning (CEO) and Daniel S. Tucker (CFO), for the Southern Company; (b) J. Jeffrey Peoples (CEO) and Philip C. Raymond (CFO), for Alabama Power Company; (c) Christopher C. Womack (CEO) and Aaron P. Abramovitz (CFO), for Georgia Power Company; (d) Anthony L. Wilson (CEO) and Moses H. Feagin (CFO), for Mississippi Power Company; (e) Christopher Cummiskey (CEO) and Gary Kerr (CFO), for Southern Power Company; and (f) Kimberly S. Greene (CEO) and David P. Poroch (CFO), for Southern Gas Company.
The fraud embedded in the 10-K for 2022 (and prior years 10-Ks) involved senior management executives like Mark Crosswhite, who had a significant role in the Alabama Power's internal controls over financial reporting. Crosswhite, the former CEO of Alabama Power, "retired" on December 31, 2023. The "Retirement and Consulting Agreement" Southern Company CEO Tom Fanning executed with Mark Crosswhite on December 7, 2022 is reproduced in the 10-K, at Exhibit 10(a)15.
The Agreement, which pays Mark Crosswhite $125,000, has no specified duties. Under the Agreement, Crosswhite is supervised and managed by Tom Fanning. It is basically a "keep your mouth shut" agreement.
Mark Crosswhite's participation in the accounting fraud scheme is NOT disclosed in any section of the 10-K, even though his "Retirement and Consulting Agreement" is. Despite the Agreement, Crosswhite did NOT sign the 10-K for 2022. His successor-in-office (Jeff Peoples), who assumed office on January 5, 2023, wound up signing the 10-K on February 15th, 2023.
Mark Crosswhite is reportedly cooperating with federal investigators who are probing the Southern Company's decades-long crime spree in exchange for full immunity. This appears to be a pro-active defensive move by Crosswhite to protect himself from the Southern Company's efforts to isolate, package, and dump as much of its illegal activity on Alabama Power Company and Crosswhite, while the Southern Company seeks a non-prosecution agreement from the U.S. Department of Justice. During a February 16, 2023 earning call, Southern Company CEO Tom Fanning all but blamed Crosswhite for everything wrong with Alabama Power and the Southern Company.
On a side note, Mark Crosswhite was pushed out of his CEO job after we revealed on August 4, 2022 that Joe Perkins spied on Fanning and his then-girlfriend, Kim Tanaka, and Alabama Power paid the bill for this surveillance activity by a private investigator. The "Homewood Notes" also confirmed Perkins' plan to spy on Ms. Tanaka.
Shareholders, investors, lenders, state and federal regulators, and the Southern Company's institutional co-owners in the Vogtle Units 3 and 4 construction projects must rely upon the completeness, accuracy, and truthfulness of the matters asserted in the company's 10-K for 2022. Two of the Southern Company's three co-owners of the Vogtle project are in litigation with the company over the staggering cost overruns at Vogtle.
Sarbanes-Oxley imposes personal criminal liability on each signatory CEO and Chief Financial Officer if this 10-K contains false, misleading, and inaccurate statements of material facts regarding the Southern Company’s financial condition, which it does.
Accounting Fraud Drivers
The two main drivers of the Southern Company’s accounting fraud schemes were: (a) the desire to pump up and maintain the company’s stock prices within the range of Wall Street forecasts and expectations, and (b) the need to meet or exceed the expectations of Wall Street analysts for the company’s utilities and power industry sector.
The Southern Company’s accounting fraud concealment techniques begin in the Risk Factors section of the 10-K. (See, “Item 1A. Risk Factors,” pages I-15 to I-26.) The company disclaims virtually everything that negatively impacts earnings and profitability. The goal of this disclaimer is to give the Southern Company “wiggling room” to pull off the accounting fraud.
The disclosed "Risk Factors" also provide a seemingly innocuous distraction from the detection of the fraud, thereby deterring heightened scrutiny on (a) whether the Southern Company's system of internal controls were adequate to prevent accounting fraud, and (b) whether the reported numbers fairly present the true financial condition of the Southern Company, in all material respects.
No disclosure of any false, misleading, or inaccurate “material" fact is made in “Item 1B. Unresolved Staff Comments.” The signatory CEOs and CFOs simply swore that there were no unresolved issues in this category. (See, 10-K, p. I-26).
The drag on the Southern Company has been its growing debt load since 2017, which springs from construction cost overruns of $4 billion or more at its coal gasification facility project in Kemper, Mississippi and $21 billion at its Vogtle Nuclear Plant Units 3 and 4 construction projects in Waynesboro, Georgia.
What is more, the Southern Company gave up and demolished its new Kemper facility in 2021, which caused a debt-financed loss of more than $7 billion.
This $28 billion in debt associated with the $21 billion cost overruns at Vogtle and the $7 billion loss at Kemper created a “Hole” in the financial records that the Southern Company had to fill, while keeping stock prices high and meeting or exceeding Wall Street expectations. Simply put, this was an impossible task.
With construction of Vogtle Units 3 and 4 dragging on for 10 years, there was no legitimate way to turbo charge the Southern Company’s operating revenues enough to plug the “Hole” created by the debt-financed cost overruns at Kemper and Vogtle. Plus, the rapidly growing debt load was sucking the profitability out of the Southern Company's consolidated operations beyond anybody's expectations.
As of December 31, 2022, the Southern Company was a $59 billion revenue enterprise that was saddled with $55.2 billion in long-term debt and $7.6 billion in credit lines. Its reported $62.8 billion in debt obligations and credit facilities exceeded its stated revenues of $59 billion by $3.8 billion. What is worse, the Southern Company and its affiliates only had $1.9 billion in "Cash on Hand," as of December 31, 2022.
The Southern Company is drowning in debt, and it is leveraged to the hilt. The 10-K for 2022 is dripping with accounting fraud. In light of the company's barely manageable debt load, alone, it is shocking that Deloitte & Touche gave the Southern Company a "clean" audit opinion for 2022.
In 2017, the Southern Company's aggregate corporate debt load was only $45 billion.
Today, Southern Company shareholders are essentially "bondholders" who receive an annual yield that is slightly higher than long-term Treasuries. They have no real equity in the company's assets, which are basically hocked out to major institutional lenders.
The Southern Company has survived as an ongoing enterprise in recent years by robbing Peter (its affiliates) to pay Paul (the Southern Company). CEO Tom Fanning has been stripping cash out of the company's registered and non-registered affiliates at an alarming rate.
Upon close examination, Tom Fanning has run the Southern Company into the ground with two white elephant construction projects -- Kemper and Vogtle. The Kemper facility has been demolished and the Vogtle project is tied up in legal challenges regarding the Southern Company's fitness to hold a combined "Owner/Operator" license from the Nuclear Regulatory Agency.
Joe Perkins' April 6, 2017 “Homewood Notes” outlined this deteriorating financial situation in dire terms. There was even a thought about filing an anonymous complaint with the Southern Company's board of directors and/or alerting "PSC voices" about the siphoning of money from the affiliates, via Southern Company Services, to "prop up bad decisions at SO."
Whatever Deloitte & Touche's auditors were doing with respect to the Southern Company's annual audits from 2017 to 2022, they obviously were NOT in the "Homewood Notes" loop of information.
Facing a constant need for investment capital, a growing debt crisis, and nightmarish cost overruns at Vogtle, cooking the financial books and records at the Southern Company became the company's answer to these growing problems.
Stay tune for Part 2, Southern Company: Using Smoke and Mirrors to Look Profitable.