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The Common Thread

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Posted by: Jack Ciesielski	3/28/2006 8:06 AM
A couple of recent restatements ... Calgon Carbon Corporation filed a non-reliance 8-K yesterday, for a total $1.4 million (pretax) understatement of expenses in 2005. Reason: "The Company determined that it failed to record invoices for professional services in a timely manner totaling $0.6 million for the quarter ended March 30, 2005; $0.5 million for the quarter ended June 30, 2005; and $0.3 million for the quarter ended September 30, 2005." No clue as to the nature of the professional services. The amended 10-Q shows that the adjustments knocked another 2 cents from net earnings per share for the nine month period. CSK Auto Group filed a non-reliance 8-K yesterday, too, covering its financials from 2005 and 2004. Multiple reasons: "... the accounting errors and irregularities relate primarily to the Company's inventories and vendor allowances, as follows. 1. In-Transit Inventory. The Company is investigating a potential overstatement ... It appears that at least $20 million of this inventory overstatement originated in periods prior to fiscal year 2002. 2. Other Inventory Accounts. The Company has identified certain costs included in its inventory, a portion or all of which appear to be improper. The aggregate fiscal year-end balances of these costs were approximately $13 million in fiscal 2001, $14 million in fiscal 2002, $28 million in fiscal 2003, $32 million in fiscal 2004 and $25 million in fiscal 2005... 3. Vendor Allowances. Certain vendor allowance receivables on the balance sheet at the end of fiscal 2004 that were refunded or written off in fiscal 2005 are being investigated. It appears that between approximately $4 million and $10 million of such receivables may have resulted from errors or irregularities in prior periods." CSK Auto Group is still investigating the details of its problems; restatement forthcoming. So - what's the common thread? There are two of them. First, none of these problems related to exotic interpretations of accounting literature for derivatives, or pensions, or anything remotely complex accounting-wise. They related to failures of internal controls over basic transactions within each firm, the essential blocking and tackling that should take place every day. In both cases, the blocking and tackling didn't happen for months, even years. Second, both of these firms have market caps below $700 million. They're examples of the kinds of companies that would benefit from "lighter regulation" sought by the SEC's Advisory Committee on Smaller Companies. And they both show why it's a mistake.

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