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Corporate accounting errors persist
By Al Lewis, Staff Columnist
Denver Post
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 dollars.

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 fees.

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 Lewis study.

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 study.

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 this conclusion.

Al Lewis' column appears Sundays, Tuesdays and Fridays. Respond to Lewis at, 303-954-1967 or