Interesting restatement yesterday from Tenet Healthcare. (Most of them are, you know, in a semi-perverse sort of way.)

The firm is restating its financials from May 31, 2000 through December 31, 2004. (The figures for the first nine months of 2005 have already been restated.) The restatement is the result of an investigation being performed at the request of the audit committee; it's being carried out by Debevoise & Plimpton and a forensic accounting team from Huron Consulting Group. (If Huron Consulting Group sounds familiar, maybe you recall their annual restatement tabulation. Evidently, they get some pretty good first-hand experience with restatements.)

What made this one so interesting? Some of the adjustments run counter to what you'd expect in a restatement. And nearly all of them provide investors a lesson in how little you can sometimes tell about what's going on underneath the hood. Let's take a look at the restatement adjustments:

"Some contractual allowances and other reserves recorded at certain hospitals lacked adequate supporting documentation or were otherwise inappropriate." Whenever you see the phrase "lacked adequate supporting documentation," you can't expect anything good. Either things were so badly controlled that a firm was using guesswork as a foundation for publishing financials, or more cynically, it might also mean that unsubstantiated numbers were intentionally published for the purpose of meeting expectations. There's no back story in the 8-K about this adjustment, and there's no speculation here as to what really happened. All you can say is that it isn't a crowning achievement for the management team in place during the time the incorrect allowances and other reserves were initially recorded.

"Certain revenues related to a managed care payor in bankruptcy, and revenues related to Medicaid disproportionate share payments and Medicare outpatient revenues under the then new Medicare outpatient prospective payment system (“OPPS”) should have been recognized in earlier periods." The curious thing here: when firms take liberties with revenue, you'd expect them to be recognizing it early. In Tenet's case, the revenue recognition in question was delayed. Whether by intention or design is unknown; no speculation offered here. But it's not an area of high transparency to investors, for sure. When companies accelerate revenue recognition, there are some tell-tale signs. For example, receivables might take longer to collect. When companies delay recognition, it's harder to discern. An improvement in receivables turns might be accepted at face value, instead of launching questions about other revenue recognition practices.

"The Company's estimated professional and general liability reserves were not adequately increased in earlier periods as a result of a prior management decision that the effect of this adjustment would have been immaterial when offset against other unrecorded adjustments in the same period." This is the most interesting one of all, on several levels. First, it shows what can happen when apparently minor errors aren't voided because of other offsetting minor errors that don't get recorded. They can snowball, and it's painful to bring them to heel when they grow up ugly. Second, these adjustments related to reserves that are pretty subjectively determined and not subject to a lot of required disclosure about the activity within them. If firms were required to completely disclose the activity in typical 10-K format for accruals like these (and others similar to them - say, like for workmen's comp), maybe controllers and CFOs of firms would sharpen their pencils more before publishing their figures. And maybe the daylight would make them think twice before going out on a limb with questionable numbers.

There were also tax effects involved in the restated amounts that affected the new bottom lines. The net effect of the restatements: an increase $.05, $.03, and $.06 in earnings per share in years ending May 31, 2000, 2001, and 2002, respectively; a decrease of $.03 in the seven-month transition period ending December 31, 2002; and a decrease of $.12 and $.10 per share in the years ending December 31, 2003 and 2004.



All the adjustments were pretty much Tenet-specific, not the result of some SEC sweep on a particular topic. Not much to have tipped off investors either, when you consider that the adjustments related to issues that don't afford much visibility to investors: support for allowances and reserves, revenue recognition timing issues, and adequate recognition of obligations. Think of it as a reminder to yourself that sometimes, you just don't know how much you don't know.