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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

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