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

Nov 3

Written by: Jack Ciesielski
11/3/2005 6:40 AM 

The past week has seen three companies issue some unsettling news about their financial reporting: namely, they can't report. Not until they're finished their accounting investigations.

The one making the biggest sensation is Mercury Interactive (ticker MERQE: murky?). According to an 8-K filed yesterday reporting the departure of the CEO, CFO and general counsel, a special committee is investigating the goings-on surrounding the reporting of stock options. Apparently, there were manipulations of dates of both grants and exercises for years, dating back to 1995 and through April 2002. The 8-K states that the officers knew of the manipulations and personally benefitted from them.

Exactly what kind of misstatement occurred is not clear. The filing says that there were "forty-nine instances in which the stated date of a Mercury stock option grant is different from the date on which the option appears to have actually been granted. In almost every such instance, the price on the actual date was higher than the price on the stated grant date. These instances represent the overwhelming majority of the grants between January 1996 and April 2002. The misdating occurred with respect to grants to all levels of employees." It should be clearer once the firm reports its third quarter.

On Halloween, CB&I (Chicago Bridge & Iron Company N.V. ) reported on an 8-K filing that it would delay its third quarter reporting until it clears up its accounting mysteries. According to the filing, the reporting delay "was precipitated by a memo from a senior member of CB&I's accounting department alleging accounting improprieties, including the determination of claim recognition on two projects and the assessment of costs to complete two projects." Other than the fact that it might result in a charge of $.09 to $.11 per share, there wasn't much detail offered about the nature of these misstatements.

Finally, going back to last week, GSI Commerce reported that it would delay its third quarter earnings release until November 10, by which time it hopes to have cleared up the mystery of whether some portion of $283,000 of "certain credits" recorded in 2004 really belonged in 2005. A second accounting mystery revolved around what the firm owes its suppliers: the accounts payable could be understated by as much as $300,000 or overstated by as much as $1.2 million. That's a pretty interesting range of possibilities when you think about it, because the correction could be painful or profitable.

And you probably thought that the restatements were going to calm down once the Section 404 reporting concluded. Not a chance. Of the three, though, the Mercury Interactive is the most interesting - partly for the murkiness surrounding the deeds done, partly because it involves stock options and partly because of the three companies' issues, it's easiest to imagine the Mercury Interactive issues transpiring in other companies. Stay tuned.