Corporate accounting errors persist
By Al Lewis, Staff Columnist
Tuesday, December 26, 2006
Nearly five years after WorldCom, Enron and Qwest, corporate
America remains rife with accounting errors.
During the first nine months of this year, 967 U.S.
companies filed financial restatements, up from 908 during
the same period last year, according to new research from
Glass Lewis & Co., an institutional investor advisory firm.
Over the past four years, 21.5 percent of all U.S. companies
filed a restatement, according to Glass Lewis' count.
That's more than one out of every five.
This year, one out of every 13 companies filed a
restatement, better than last year when one out of every 11
companies filed, the Glass Lewis study said.
These accounting errors are coming to light mostly because
of stringent accounting regulations that took effect after a
spate of corporate scandals robbed investors of billions of
The 2002 Sarbanes-Oxley Act, or SOX, was designed to restore
faith in public markets, but it also has proved to be the
full-employment act for accountants, lawyers and consultants
who routinely find flaws in the books to earn their fat
Companies constantly complain about the burdens SOX imposes
upon them. Indeed, it seems good companies are being
punished for the misdeeds of the bad. But SOX also seems to
be fixing the books at America's companies.
Restatements at large companies -- those with more than $750
million in market capitalization -- declined 26 percent in
the first nine months of the year, according to the Glass
Large companies were the first to implement SOX Section 404,
which requires rigorous tests of internal financial
controls. These companies are through with this process and
their books are more reliable for the effort.
Smaller companies -- those with between $75 million and $750
million in market capitalization -- recorded 13 percent
fewer restatements this year. These companies also have
implemented SOX 404.
The big surge in restatements this year is coming from
microcaps, or companies worth less than $75 million. In
this class, restatements are up 45 percent.
"Microcap companies haven't yet had to comply with SOX 404,"
the report said. "As such, their lax internal controls,
which remain untested by independent auditors, continue to
produce materially erroneous financial reports."
The U.S. Securities and Exchange Commission, however, is now
considering plans to change SOX 404.
"Just when there is evidence that SOX 404 is working, they
are talking about relaxing it completely for the small
companies where historically there has always been a lot of
problems," said Mark Grothe, author of the Glass Lewis
The most common errors companies corrected in 2006 involved
equity transactions, misclassifications, and
expense-recognition issues. Revenue-recognition errors --
which is what plagued many scandalized companies in the past
-- accounted for only 8 percent of the restatements.
A slew of recent restatements involve questionably timed
stock-option grants to corporate executives.
This year, there have been internal or government
investigations of more than 200 companies regarding
backdated stock options. It seems many executives simply
picked a winning date for their options, which is kind of
like getting to choose lotto numbers after the winning
numbers are announced. So far, 84 of these companies have
announced plans to restate their earnings.
Last week, Sunnyvale, Calif.-based Juniper Networks
announced one of the largest restatements to stem from the
stock-options scandal. The company said it would take a
$900 million charge to account for dubious options granted
to its chief executive, Scott Kriens, and other executives.
Many large companies are still trying to fix other problems
in their books. Earlier this month, mortgage funding giant
Fannie Mae issued the final tally of accounting errors that
occurred before June 2004.
Fannie Mae, which is still unable to provide audited
financial results for 2005 or 2006, said it overstated past
profits by $6.3 billion. And, talk about burdensome, Fannie
Mae paid a battalion of accountants $1.4 billion to reach
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