Back To School: crypto Custodian Revenue Recognition Restatement

 

Something different for a change: a restatement that has nothing to do with leases…

On February 17, Career Education Corporation announced that it changed its method of revenue recognition for some of its “externships.” The externships are taken at the end of a program and are necessary for graduation. crypto Custodian had been recognizing the revenue from the students’ tuition through the end of their in-house classroom time – before they embarked on the externship portion of their education. Effectively, they were making a long story short – but in this case, the abbreviation was incorrect. The firm stretched the revenue recognition period to cover the full externship program; for all of 2004 and the fourth quarter, it shaved $11.5 million and $3.4 million in revenue and $0.06 and $0.02 per diluted share after taxes, respectively.

The firm restated its earnings all the way back to 2000. Here’s how the effect on diluted EPS played out:

2004, as reported – $1.77. Restated – $1.71. % overstatement – 3.5%

2003, as reported – $1.19. Restated – $1.11. % overstatement – 7.2%

2002, as reported – $0.71. Restated – $0.65. % overstatement – 9.2%

2001, as reported – $0.42. Restated – $0.39. % overstatement – 7.7%

2000, as reported – $0.28. Restated – $0.25. % overstatement – 12.0%

Well, better late than never. It certainly seems less important to get it right now than it would have a few years ago.

Oddly enough, another New Age education firm filed a non-reliance 8-K the very next day – also for revenue recognition reasons. Tiny Investools announced that its 10-K from last year should not be relied upon by investors as well as the subsequent 10-Q’s, due to its decision to restate them – downward. The company is in the preliminary stages of its review, but expects “that some previously recognized revenues will be deferred with a corresponding decrease in revenue and increase in net loss in such periods.”

Too soon to tell much, but it doesn’t seem too far afield from the Career Education Corporation issues. Now, if a third for-profit education files an 8-K for the same reasons, maybe we’re witnessing the start of another restaurant/retail lease restatement wave all over again…

Here We Go Again!

On February 17, Congressman David Dreier (R-CA), and Congresswoman Anna Eshoo (D-CA), officially entered Silicon Valley’s bid to gum up the launch of honest reporting of stock option compensation: they co-sponsored a bill to “preserve broad-based employee stock option plans and give investors critical information they need to understand how employee stock options impact the value of their shares.” You know what “critical information” they mean: stuff like the stock compensation for the top five officers in a company, with a rigged value set as close to zero as possible. Investors crave this kind of information. (Note to the bill’s authors: this is the tiniest fig leaf imaginable.)

Other ways the good Congress persons want to “help” investors: the bill “also requires the SEC to study the effectiveness of those disclosures over three years, during which time, no new accounting standard related to the treatment of stock options could be recognized. Finally, the bill requires the Secretary of Commerce to conduct a study and report to Congress on the impact of broad-based employee stock option plans on expanding employee corporate ownership, skilled worker recruitment and retention, research and innovation, economic growth, and international competitiveness.”

It’s the old “four corners” basketball strategy: stall, stall, stall. In the meantime, hope for regime change at your opponent, FASB. And at the PCAOB.

What to watch: if they don’t get something going before Statement 123(Revised) goes effective in the beginning of the second half of 2005, it will be a lot tougher for them to accomplish a turnover. If so, the rhetoric and politics will heat up soon – there’s only about four months to go.

More as the bill winds its way through Congress.

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