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The AAO Weblog covers accounting issues and current events as they relate the practice of investment analysis. All posts prior to September, 2007 are in the public domain, but after September 4, only subscribers to The Analyst's Accounting Observer will see all posts going forward. Only selected, occasional posts will be released to the public domain from September 4 forward.

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Maxtor's "Oops"
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Posted by: Jack Ciesielski 5/24/2005 5:49 AM
Maxtor Corporation filed a non-reliance 8-K this morning, due to an error in recording quarter-end inventory last March. The error itself was a humbler: goods worth $2 million had been shipped FOB destination at the end of the quarter, meaning they belonged to Maxtor until they arrived at the customer's door. A journal entry had been properly set up to keep the goods in inventory, and out of cost of goods sold at period end - but the entry was inadvertantly reversed when it was recorded. The inventory was understated, and cost of goods sold was overstated.

How much? Inventory was understated by $4 million (1.8%); cost of goods sold was overstated by $4 million (0.4%). Not much of a balance sheet effect. But on the income statement, net loss was overstated by $4 million (16.7%) and the (ever-important) net loss per share was overstated by $0.02 per share (20%). In the rock 'n roll 90's, maybe that would have been shrugged off; maybe not. (Not that it would have been right.) But precision was definitely looser when it came to materiality.

As mentioned earlier, materiality is apparently being dialed down after the first round of internal control reviews - and when the SEC releases its new missive on materiality, it'd be reasonable to expect to see a lot more restatements. Need more evidence of increased precision in figuring materiality? Look no further than the SEC's comments on lease accounting and the restatements that ensued. Make no mistake about it: 2005 will set a record when it comes to sheer volume of restated financials. Sticking to standards and a narrower view of materiality are reasons why.
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