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The AAO Weblog covers accounting issues and current events as they relate the practice of investment analysis.

Feb 23

Written by: Jack Ciesielski
2/23/2006 8:02 AM 

About a month ago, I mentioned Tenet Health Care's restatement of financials from 2000 through 2004, based on a forensic review being carried out by Debevoise & Plimpton and Huron Consulting Group. Yesterday, they heaped another non-reliance warning on top of their previous "do not rely" admonition. Last time, it had to do with "under the hood" happenings that were quite invisible to investors; this time, it's along the same lines, but it has to do with taxes and stock option compensation. And it wouldn't be surprising if more of these emerge in the first quarter as companies get their stock option accounting polished up in anticipation of implementing Statement 123R.

Some of the Debevoise & Huron adjustments increased the net operating losses on the company's tax return. As a consequence, they also affected the amount of deferred tax assets on the financial statements, along with the valuation allowance. The charge for valuation allowance was allocated three ways: continuing operations, discontinued operations, and additional paid-in capital (due to excess tax deductions hanging over from earlier stock options awards.)

In closing 2005 and setting up for the implementation of 123R in 2006, Tenet's managers realized that the additional paid-in capital allocation was wrong and should have been part of the tax expense for continuing operations. They haven't yet determined the right allocation of the charge between continuing and discontinued operations.

What's curious about the restatement is that the catalyst for the tax adjustment was the implementation of Statement 123R. A while ago, it seemed like there was going to be a wave of restatements generated by the new standard's implementation; turned out to be just a brief ripple. Though you could argue that this one popped up because Tenet had control issues of its own, the "novelty" of Statement 123R still makes me wonder if there are more of these around the corner. (Even though its essence has been around for over 10 year, 123R is still novel if firms weren't applying 123 Classic in its strongest form.)