Francine McKenna picked up the Deloitte story I wrote the other day and did a bit of digging of her own. When I read Francine’s opinion I was a tad befuddled. The problem she identified occurred on 2006. In the 2006 annual report, the company said:
During our fiscal year ended September 30, 2006, we held variable rate demand notes as an investment. In our balance sheets as of December 31, 2005, March 31, 2006 and June 30, 2006, we classified these securities as cash and cash equivalents rather than short-term investments as required by generally accepted accounting principles (GAAP).
We also reported the purchase and sale of these securities in our statements of cash flows for the three months ended December 31, 2005, six months ended March 31, 2006 and nine months ended June 30, 2006 as purchases and sales of cash equivalents. Upon further review, our management determined that these securities should be reported on our balance sheets as short-term investments, and that the purchase and sale of the securities should be reported on our statements of cash flows in the investing section. Our management determined that a material weakness in internal control over financial reporting with respect to the accounting for and disclosure of short-term investments existed as of September 30, 2006.
Specifically, controls were not operating effectively to ensure that (i) short-term investments were properly excluded from cash and cash equivalents on the balance sheet, and (ii) the corresponding purchases and sales of short-term investments were properly presented in the investing section of the statement of cash flows. The misclassification of these securities of approximately $3.6 million at September 30, 2006, had no impact on our current assets, working capital, stockholders’ equity, net income (loss), net income (loss) per share or net cash provided by operating activities for the affected periods.
Deloitte gave Catapult a clean bill of health and unless I’ve missed something, made no mention of this problem. To them at least, this was not a big deal. Neither do I think it’s a big deal when taken in the round except where one is looking at the analysis of cash and short term investments. My analyst buddies say they don’t worry too much about this split unless there is clear evidence of distress. OK – so Catapult is losing money but its cashflow statement remains healthy. Where’s the big deal here?
This is the point where I disagree with Francine. In essence we’re talking about a misclassification. Given that total cash assets at the time was some $22.4 million, it’s a pretty large number. So yes, there was something wrong in the control system and it is something I have seen before on a number of occasions. But I don’t accept Francine’s assertion that:
Looks to me that they are not so much penny wise and pound foolish but a bunch of spoiled, insolent children intent on having their way.
Hey SEC – Isn’t auditor/opinion shopping against some rule of yours?
Better keep an eye on these guys.
I don’t see this. I realise the US has become control crazy and jumps at the least indiscretion. I agree with Francine the CFO was lax. But people make honest mistakes (there is no suggestion the company was trying to mislead investors) the company discovered the issue for itself and it was not an audit matter, it was fully disclosed and then spent the next year managing the problem. Deloitte wasn’t bothered and it had no effect on the business. Where’s the foul?
Furthermore, if ‘opinion shopping’ is well known then that’s a matter for the SEC to consider. Given that Catapult gave a detailed explanation as to why it is changing, I believe they’ve covered themselves. If not then they’ve engaged in a blatant and clumsy makeover. Somehow I doubt that.
I left an abbreviated version of my thoughts at Francine’s site and as at the time of posting, it is awaiting moderation.
Tracy Coenen also picked up on Francine’s story and I left a similarly worded comment there.
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