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Wyndham Dials Down Materiality

Location: Blogs AAO Weblog (Public)
Posted by: Jack Ciesielski	5/18/2005 7:23 AM
One side-effect of the Sarbanes-Oxley Section 404 has been a heightening of precision in what companies consider to be a "material" error or misstatement. Not a bad thing at all: in the wild and wooly 90's, SEC officials stated concerns that financials were were deliberately presented with known errors that were dismissed as "immaterial" but helped firms in getting over the bar for earnings estimates. Multiply a penny per share by 100 million shares outstanding and a price-earnings multiple of 30, and you're talking about some serious market cap fluff. The SEC is rumored to be developing a release for this summer (probably a Staff Accounting Bulletin) which will suggest when long-running errors that might have been immaterial in any one period should be cleaned up all at once. It will likely augment - and not replace - the six-year-old Staff Accounting Bulletin No. 99, "Materiality." That particular interpretation now looks like it's being applied with much more rigor. Case in point: Wyndham International. The hotel operator filed an amended 10-K and a non-reliance 8-K yesterday. In the 8-K, the firm disclosed that "the Company identified an additional tax charge of $1.7 million related to 2004 and reconsidered other previously identified but deemed immaterial adjustments related primarily to accruals of unbilled legal and consulting fees aggregating $1.8 million related to 2004. The Company's Audit Committee and management consider the charges to be immaterial to the Company's financial position and the results of operations for the year ended December 31, 2004. However, even though the adjustments are only 0.14% of the first quarter 2005 total assets, 0.15% of total liabilities, 2.5% of shareholders' equity and 1.2% of the first quarter 2005 total revenues, the $3.5 million adjustments as a percentage of the first quarter 2005 loss from continuing operations of $48,000 are significant. As a result, on May 11, 2005 it was determined that the financial statements for the year ended December 31, 2004 should no longer be relied upon. The restatement resulted in the Company adjusting its previously reported 2004 net loss of $509.5 million ($4.01 per share) to net loss of $512.9 million ($4.03 per share)." (Funny how a loss can magnify the effect of what would otherwise be considered an immaterial adjustment.) Revisions like this might be quite common this summer and fall if the SEC guidance is issued and is as stringent as is expected. Restatements might emerge more frequently regardless, just because firms with internal control issues from the past reporting season might amp up their precision threshhold as they remediate their problems.

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