Semiconductor manufacturer International Rectifier (IRF) gave a heads-up to investors in early April that all was not right with its financials for the year ended June 30, 2006 and various quarterly periods. At the time of their announcement, the company was still in the preliminary stages of its investigation and really didn’t offer much in the way of describing what was wrong with the financials.
Now they’ve fleshed things out a bit, and filed another non-reliance 8-K with more details. What happened?
A foreign subsidiary had, “from time to time,” entered unrequested orders from customers into the revenue system. That “resulted in the shipment of products and the recording of sales with no obligation by customers to receive and pay for the products. The practice included routing certain product shipments to warehouses not on the Company’s logistical systems.”
You could consider that a pretty serious lack of internal controls; so does IR’s audit committee. Interestingly, the 8-K notes that “a significant increase in the reported sales by that subsidiary during the quarters ended March 31, 2005 and June 30, 2005 may have resulted from the practice described above.” That sounds like someone was very concerned about meeting targets and felt compelled to be creative.
No word yet from the company on the extent of how the improper “sales” affected revenues, receivables and inventory; all things in due time, one supposes. The company may have missed the forest for the trees in completing its internal control review at the end of 2006; no mention of the foreign situation in its internal control report - and no contradiction of its assessment by its auditors, either.
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One backdating-related bleat for the day: Dean Foods (DF) mentioned in its 10-Q that it had been notified by the SEC that the informal investigation into its option practices had ended with no recommended enforcement action. This is just after the same kind of disclosure by Nabors Industries (NBR). Is this what the end of the options backdating investigations looks like?
IRF 1-yr chart: