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UTStarcom Accounts for Errors

UTStarcom Inc. (Nasdaq: UTSI) says it is changing its accounting procedures, after admitting that it made some mistakes in the way it internally reported revenues last quarter.

In a statement today, the access and wireless gear company said it found "certain significant control deficiencies exist related to the review and evaluation of criteria related to revenue recognition" (see UTStarcom Files Q2 ).

The company also filed its 10-Q (quarterly report) with the SEC, which was due five days ago, but delayed as UTStarcom resolved an issue surrounding $1.9 million in revenues that weren't recognized properly.

One of UTStarcom's offices outside of China initially reported the $1.9 million as revenues, but the company found that it wasn't yet ready to recognize that piece of business, so the amount was backed out of its earnings, which were reported on July 27.

"The issue is not the $1.9 million, but it's about the process as to why this amount was approved as revenue," explains Chesha Kamieniecki, UTStarcom's senior investor relations manager.

Kamieniecki says UTStarcom reviewed five past quarters of revenues and found that the reporting mistake was an isolated incident.

UTStarcom also acknowledged today that it "cannot be certain that it will be able to comply with the requirements of Section 404 [of the Sarbanes-Oxley Act of 2002] by the December 31, 2004 deadline."

Sarbanes-Oxley is a measure that gives investors more protection from corporations' potentially fraudulent accounting activities. UTStarcom may be subject to fines if it doesn't become "Sarbanes-Oxley compliant" in time.

And, in the company's 10-Q, analysts found more detail about the company's cash flow from operations -– a metric that shows how well a company can pay its bills, regardless of whether it has positive earnings.

"Cash flow from operations was a negative $91.2 million, compared with a negative $27.3 million in 1Q04 and a negative $81.1 million in the year-ago period," writes Oppenheimer & Co. analyst Lawrence M. Harris, who reiterated a Sell rating on UTStarcom shares today.

"While 2Q earnings were restated upward by $0.01 per share, the change was as a result of the company's finding additional accounting errors," Harris writes.

Investor concerns surrounding gross margins in China, now in addition to accounting irregularities, have caused UTStarcom's shares to drop about 48 percent since July 1.

— Phil Harvey, News Editor, Light Reading

jim_smith 12/5/2012 | 1:21:57 AM
re: UTStarcom Accounts for Errors ... but that business model is diametrically opposed to what the SEC requires of publicly traded U.S. companies. Even moderate success in China and many other LDC's requires blatant bribery among other improprieties.

I don't think it is insane at all.

You know, bribery also has a lot of unwritten rules and regulations.

In fact, if anything, navigating the labyrinthine rules and regulations of the SEC only prepares you better for doing business in LDCs.

Those models that you speak of are anything but diametrically opposite.
rbkoontz 12/5/2012 | 1:21:57 AM
re: UTStarcom Accounts for Errors How insane is it to attempt to be both:
(1) A competitive telecom vendor who garners the majority of its business from China or, soon, even India.
(2) A fiscally responsible, publicly traded U.S. company subject to detailed financial reporting, SEC rules, Sarbanes-Oxley, etc.

I applaud UT's success to date in China, but that business model is diametrically opposed to what the SEC requires of publicly traded U.S. companies. Even moderate success in China and many other LDC's requires blatant bribery among other improprieties.
WiserNow 12/5/2012 | 1:21:43 AM
re: UTStarcom Accounts for Errors UT Starcom has a significant infusion of leadership from the old Ascend Communications company. It would be amusing to see what the Ascend books looked like when Lucent took over.

Sales, Engineering, Product Management -- all full of folks who learned their tricks from a master.

I wonder when Zhone will hit the SEC speedbump.
materialgirl 12/5/2012 | 1:21:20 AM
re: UTStarcom Accounts for Errors Get ready for a deluge of accounting restatements and retractions. Section 404 of Sarb-Ox is a time bomb. No one is worried about it now, because they have ignored it. As November approaches, an unprepared managements panic, expect more comments like this. I just think USTI is more careful than most, so we are seeing this early with them.
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