UTStarcom (UTSIE): Startling quotes from 10-K

Apr.17.05 | About: UTStarcom, Inc. (UTSI)

UTStarcom (ticker: UTSIE), a telecom equipment maker with operations in China, filed its delayed 10-K on Friday. The 10-K is full of startling admissions, some of which should come as no surprise - the CFRA has been voicing concerns over the company's finances since 2003. Take a look at these excerpts:

1.   As of December 31, 2004, the Company
did not maintain effective controls over the financial reporting process due to
an insufficient complement of personnel with a level of accounting knowledge,
experience and training in the application of generally accepted accounting
principles commensurate with the Company’s financial reporting requirements. This
material weakness contributed to the following control deficiencies relating to
the preparation of  the Company’s
financial statements which are individually considered to be material
weaknesses:

(a)    The
Company did not maintain effective controls over its revenue and deferred
revenue accounts and associated cost of sales. Specifically, the Company’s
controls over its processes and procedures related to the recording and review
of its revenue and deferred revenue accounts were not adequate to ensure that
such accounts were completely and accurately recorded. In particular, the
following exceptions were identified in which revenue recognition criteria were
not properly assessed: treatment of upgrade protection in a multiple element
arrangement, non-standard contractual terms and conditions, exceptions to final
acceptance confirmations received from customers, tracking of proof of delivery
and timing of execution of final acceptance confirmations, and the
identification of the appropriate costs associated with selected sales
transactions. This control deficiency resulted in adjustments to the second
quarter 2004 financial statements and audit adjustments to the fourth quarter
2004 financial statements to properly recognize revenue and cost of sales.

(b)   The Company
did not maintain effective controls over its inventory, deferred costs,
inventory reserve accounts and cost of sales. Specifically, the Company’s
controls failed to adequately identify, document and analyze the conditions
that should have been considered relative to the existence and expected
recoverability of inventory and deferred costs. Principally in Japan, controls
were not adequate to properly track and confirm inventory movements or ensure
the timely recognition of cost of goods sold. In addition, certain inventory
purchases were approved locally but were not in accordance with the Company’s
usual procurement polices and procedures. This control deficiency resulted in
certain audit adjustments to the fourth quarter 2004 financial statements to
correct cost of goods sold and the related inventory and deferred costs
accounts.

(c)    The
Company did not maintain effective controls over its processes for accounting
for goodwill. Specifically, the Company’s controls over its processes and
procedures related to its assessment of the impairment of its goodwill account
were not sufficiently detailed to identify instances of impairment as required
under generally accepted accounting principles. This control deficiency
resulted in an audit adjustment to the fourth quarter 2004 financial statements
to recognize the impairment of the Company’s goodwill associated with the
operations of an entity acquired and substantially abandoned in 2004.

(d)   The Company
did not maintain effective controls over the process for the translation of its
accounts and transactions denominated in a currency other than U.S. dollars. Specifically,
the Company’s controls over its processes and procedures related to the
translation of transactions and account balances denominated in a currency
other than U.S. dollars failed to identify and utilize the appropriate foreign
exchange rates, primarily related to the cash, accounts receivable, accounts
payable, and other comprehensive income accounts. This control deficiency
resulted in certain audit adjustments to the fourth quarter 2004 financial
statements to properly record unrealized foreign exchange gains.

(e)    The
Company did not maintain effective controls over the recording of accrued
expenses, primarily in China and Japan. Specifically, the Company’s controls
over its processes and procedures related to accrued expenses failed to
completely and accurately record expenses in the proper period. The review of
open purchase orders and invoices received as part of the close process was
insufficient to ensure that the 2004 year-end accrued expense balances were
completely and accurately recorded in the proper period. This control
deficiency resulted in certain audit adjustments to the fourth quarter 2004
financial statements to properly record certain accrued expense and related
income statement accounts.

(f)    The
Company did not maintain effective controls over the financial reporting
process to ensure the accurate preparation and review of its financial
statements. Specifically, the Company’s controls over the completeness,
accuracy and review of its documentation of close processes relating to
reconciliations, journal entries, spreadsheets, international reporting
packages and review and preparation of monthly expenditure reports were
ineffective in their design and execution. In addition, the Company did not
have effective controls over the process for identifying and accumulating all
required supporting information to ensure the completeness of its footnote
disclosures, including the support for the accounting positions taken on
non-routine transactions, goodwill impairment, purchase accounting, segment
reporting, accounting for potential variable interest entities, intercompany
profit eliminations and income tax accounting and proper classification of
inventory and deferred costs, deferred revenue and accounts receivable, and
revenue and cost of goods sold. These control deficiencies resulted in certain
audit adjustments to and additional disclosures made in the 2003 and 2004
financial statements.

(g)    The
Company did not maintain effective controls over the completeness and accuracy
of its income tax provision and related balance sheet accounts. Specifically,
as part of its 2004 year-end close process, certain errors related to income
taxes payable, deferred income tax assets and liabilities, other long-term
assets, prepaids and other current assets were identified in the calculation of
the Company’s 2003 income tax provision. This control deficiency resulted in
the restatement of the Company’s financial statements for the quarters and full
year of 2003 as well as audit adjustments to the fourth quarter 2004 financial
statements to adjust the provision for income taxes, stockholders’ equity,
income taxes payable, other long-term assets, prepaids and other current
assets.

(h)   The Company
did not maintain effective controls in relation to segregation of duties and
user access to certain Oracle business process applications nor were there
effective controls in place to monitor user access. There were instances in
which either information technology or finance personnel maintained access to
specific applications within the Oracle environment beyond that needed to
perform their individual job responsibilities. This deficiency related to
financial reporting, inventory and purchasing applications in China and
financial reporting applications in the United States.

Read more from the 10-K here.

UTSIE's stock market performance:

Utsie416