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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, 2007, 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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Posted by: Jack Ciesielski	3/30/2006 8:39 AM
A couple of days ago, I mentioned a couple of small cap companies (Calgon Carbon & CSK Auto Group) in disparate industries that were united by a common thread: weak internal controls over some very basic accounting functions. Both companies were small enough to be "worthy" of the relaxed internal control reporting being considered by the SEC. Here's more thread: Mattson Technology's non-reliance 8-K filed yesterday. In it, the company discloses that the "reported results for the first, second and third quarters of 2005 contained errors related to its recognition of revenue, assessment of inventory valuation, recording of depreciation and amortization expense for certain assets, and estimation of statutory liability for severance payments earned by certain foreign employees."With a $600 million market cap, Mattson Technology would neatly slip into the "smaller company" category of registrant being targeted for coddling by the SEC. As with the other two companies (and other firms noted in this space from time to time, like Fountain Powerboat and Foamex), the issues that tripped up the firm are not exotic interpretations of derivatives accounting literature; they don't relate to weird financial instrument issues, or anything else extremely complicated, accounting-wise. The episodes are simply a lack of basic blocking and tackling - and they're real-world demonstrations of the folly of granting relief to smaller companies from applying full-strength Section 404 reviews. Want more than just my anecdotal evidence? Check out the excellent report on restatements by Glass Lewis & Company. (Request the full report here.) Restatements are not exactly a service to shareholders; they're not a badge of honor for the restating companies. And very often, they're a symptom of weaknesses in internal controls. GLC found that of 1,195 restatements in 2005, 59% of them occurred in the very same "smaller company" categories that the SEC is considering. That's concrete evidence of the folly of this idea. I've yammered about the small company exemption all along; I still can't buy into it. I think the opposition to SOX is almost a "secret handshake" kind of thing among financial execs: if you don't oppose Sarbanes-Oxley at every opportunity, you're margarine, you're just not a "real" manager. (Maybe it's like liberalism in Hollywood; if you don't show it, you don't work.) Maybe such managers don't realize that their attitude is embedded with cynicism towards the shareholders, who actually own the companies and are the ones who benefit from the application of SOX 404 reviews. And you don't hear too many of them calling for preferential treatment.

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