Accounting Observer > Public Blog - Corinthian Colleges' Revenue Revision

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Corinthian Colleges' Revenue Revision

Location: Blogs AAO Weblog (Public)
Posted by: Jack Ciesielski	8/24/2005 7:54 AM
Quite a while ago, I mentioned a pair of "higher education" schools that had a little trouble with how to account for revenue - Career Education Corporation and Investools.They've been joined by another for-profit school chain: yesterday, Corinthian Colleges filed a non-reliance 8-K covering its annual financials from 2001 to 2004, and the first three quarters of fiscal 2005. Corinthian had a couple of problems in its revenue accounting. One, it didn't consistently account for the pro rata portion of revenue of students starting classes after the beginning of the month. Sometimes, it accounted for the revenue on a pro rata daily basis, which is a precise way of doing things; sometimes it included a whole month of revenue no matter when the student started in the month. The inconsistency was due to the fact that the "legacy" Corinthian Colleges firm accounted for revenue on a monthly basis, while some of the firms it acquired accounted for revenue on a daily pro rata basis. Apparently, the firm didn't mesh the two conflicting systems together at acquisition. If you're looking for examples of where accounting controls took a back seat to growth by acquisition, include this one. The second revenue issue had to do with "externships," one of the bugaboos at Career Education Corporation. Upon completing their "in-house" studies, students enter an externship afterwards. Corinthian recognized student revenue over the period ending with the in-house studies, instead of the longer period including the end of the externship. That has the effect of recognizing revenue earlier than when Corinthian's services have been completely delivered to the student. The revised financials will incorporate a mid-month convention for revenue recognition, with a half month of revenue recognized in both the initial month and the final month of attendance - and tuition revenue will be recognized through the end of each student's externship period. Cumulative effects: retained earnings at the end of fiscal 2004 will decrease by approximately $16.9 million. About 52% of the impact is related to the mid-month convention and the rest is related to extending revenue recognition through the externship period. Diluted net earnings per share will decrease by approximately $0.04, $0.04 and $0.06 for the fiscal years ended 2002, 2003 and 2004, respectively, and $0.04, $0.00 and $0.01, for the quarters ended September 30, 2004, December 31, 2004 and March 31, 2005, respectively. The amounts involved aren't necessarily small on a relative basis: the company earned $.44, $.72 and $.87 in years 2002 through 2004. That's an overstatement of 9%, 6% and 7% in those respective years. Value Line shows an average annual P/E ratio of 25.6, 26.6 and 33.6 during those three years - so even small overstatements could have a significant effects on the company's market cap. At those multiples, the incremental earnings were worth about a buck of share price in 2002 and 2003, and two bucks in 2004.

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