In a record year for financial restatements, the wireless industry managed to stay relatively unsoiled. While other telecommunications, financial and manufacturing companies in 2004 faced various bookkeeping snafus, few wireless players were forced to dust off their financials.
Nonetheless, there were a few accountants in the wireless industry working late nights. Nortel Networks Ltd., Cingular Wireless L.L.C., UTStarcom Inc. and others in wireless have recently had to recheck their bottom lines.
“It’s the exception, rather than the rule, that a financial restatement is positive,” said John Bright, vice president with investment banking firm Avondale Partners L.L.C.
A number of issues can spark a restatement, some benign and others explosive. According to Huron Consulting Group, which tracks restatements, investors had to digest a record number of restatements last year, mainly due to increased regulatory scrutiny.
“There were several trends affecting financial reporting in 2004, but among the most significant was the impact of Sarbanes-Oxley Section 404 procedures,” said Joseph Floyd, managing director and national practice leader for Huron’s disputes and investigations practice. “The intense focus brought by Section 404 and its requirements for the management of public registrants to thoroughly document, test and take responsibility for the effectiveness of their company’s safeguards for quality financial reporting has resulted in an unprecedented period of scrutiny on how registrants produce financial results for investors.”
Huron found that the number of financial restatements up and down Wall Street jumped 28 percent last year compared to 2003, from 323 to 414. In 2002 there were 330 restatements, 270 in 2001 and 233 in 2000. Lease accounting and Sarbanes-Oxley served to drive much of last year’s restatement frenzy. Indeed, AMR Research Inc. estimated U.S. businesses will spend $80 billion on compliance with federal mandates like Sarbanes-Oxley during the next five years.
In general, Huron found that last year’s restatements fell into five main categories, with revenue recognition and equity issues driving the majority of companies’ accounting woes. Revenue recognition is just that-where a company has improperly recognized revenue on transactions-while equity accounting issues involve miscalculated stock options, earnings per share, warrants or other equity instruments. Other reasons for restatements included bookkeeping errors in reserves, accruals and contingencies; capitalization and expense of assets; and inventory.
In wireless, there have been a number of recent restatements. Among the most notable:
- Cingular announced restatements due to lease-accounting issues. The carrier’s restatements, stretching from 2000 to 2004, resulted in a drop of $171 million in earnings. However, Cingular said its cash flows, revenues, net subscriber additions and subscriber churn remained unaffected. American Tower Corp. reported restatements due to similar issues.
- Former Nextel Communications Inc. subsidiary NII Holdings Inc. announced restatements for the full year 2003 and the first nine months of 2004 due to a number of “computational errors.” The company said the accounting errors didn’t affect its financials.
- Nortel Networks restated its 2003, 2002 and 2001 earnings due to serious accounting issues involving its senior executives. The executives agreed to pay back a combined $8.6 million in bonuses. Nortel was set to file its 2004 restatements at RCR press time.
- UTStarcom restated several years’ worth of revenues. Requirements in Sarbanes-Oxley sparked the company’s accounting woes.
- Finally, European giant Vodafone Group plc said it adopted new International Financial Reporting Standards that could drag on its future earnings. The rules require Vodafone to adjust its amortization practices. Other companies also could be affected by those standards.
Huron said the underlying reasons for financial restatements include misapplications of accounting rules, human errors and “ethical lapses.” Investors universally frown on restatements, and such announcements almost always cause sharp drops in stock prices. However, most financial restatements are due to clarifications from the Securities and Exchange Commission and other financial agencies, and usually don’t affect companies’ bottom lines.
Nonetheless, there is always the chance a benign restatement could bloom into a controversy on the level of Enron or Level 3 Communications Inc. Thus, Wall Street typically treats restatements with the utmost concern.
