GAAP toothed: when its independent auditor changed its tune, Highwoods Properties was left whistling in the dark.

• Author: Maley, Frank
• Position: COVER STORY - Cover story

Terry Stevens gathers reference books and a few family photographs for an elevator trip from the sixth floor to the fourth. Perhaps a dozen employees of Raleigh-based High-woods Properties Inc. will join him there. They've got a lot of work ahead. Eleven-hour days, probably. For the next few months--what remains of 2005--High-woods has dibs on one day each weekend.

The company, a real-estate investment trust that claims to be the Southeast's largest suburban-office landlord, has missed deadlines for filing its financial reports with federal regulators. The preceding year, it suffered the embarrassment of having to correct its income statement, and it's about to do it again. Investors hate that. It suggests shaky, if not shady, hands at the helm.

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Highwoods has avoided sharp, lasting drops in its stock price, but September has become October. Numbers for the latest fiscal year should have been out in March. If Highwoods can't file by the end of the year, it could lose its listing on the New York Stock Exchange. Its stock would plummet. So would employee morale. About a week earlier, analysts at Baltimore-based Legg Mason had written in a report for clients and other investors: "We wonder what could cause a public REIT to be so administratively incompetent that it cannot fix its historical reporting over a period that now exceeds a year."

As Stevens, Highwoods' chief financial officer, and his team set up shop on the fourth floor, the company hopes to climb out of a pit any public company can stumble into. Accounting problems raise the specter of scandal even when they're honest mistakes or differing interpretations of rules. Some people in and close to the company feel angry, frustrated and persecuted. It made mistakes, but so far nothing major has turned up--nothing to warrant more than a year in accounting limbo. The business is doing well, thanks to a resurgent economy, but it's hard to get that message out in the absence of up-to-date financial statements.

Some think that its independent auditor, Ernst & Young, is pushing too hard, that the company is paying the price for the accounting industry's troubles. In 2002, Arthur Andersen, a giant in the field, imploded amid charges it obstructed justice by destroying documents of its client, Houston-based energy trader Enron. That same year, Congress passed the Sarbanes-Oxley Act, tightening corporate governance and bringing greater scrutiny to accounting firms still reeling from Andersen's collapse.

All summer and fall, the Highwoods employees working on the latest restatement have put in long days. Stevens and CEO Ed Fritsch worry about burnout. The group needs esprit de corps. It's given a name, the Keep Us Listed Team--KULT--and special T-shirts. It needs a place to work undisturbed by the hurly-burly of buying, selling and managing buildings, so it moves to a vacant suite at headquarters, stocked with snacks and couches. A team from Ernst & Young occupies offices one floor up. As the deadline approaches, they work even longer hours. Finally, on Dec. 22, 2005--just nine days before the deadline--Highwoods files its annual report for 2004.

The worst is over. But cleaning up the books has cost millions of dollars, consumed thousands of man-hours and left a bad taste in the mouths of people in and around the company. "When I get into that, I just want to throw up," former CEO Ron Gibson says. "Because it's a whole lot of hoo-ha about nothing."

Highwoods owns all or part of 417 office, retail and industrial properties in 10 states--about 35 million square feet, roughly equal to...