Orbitz Worldwide - Red Flags

| About: Orbitz Worldwide, (OWW)

I had previously written an article on Orbitz Worldwide (NYSE:OWW) indicating the level of stress or fragility in the company's financials.

I had also suggested that in the long run it is unsustainable. This article is on the accuracy of the numbers and the auditors' opinion.

As per the latest quarterly filing (Q1,2013 Form 10Q) page 29, the management believes that its internal controls have some "material weakness".

As reported in our 2012 Annual Report on Form 10-K, as amended by the Form 10-K/A (the "2012 Form 10-K"), as of December 31, 2012, our management concluded that our internal control over financial reporting was not effective as a result of a material weakness related to ineffective information technology ("IT") controls. Solely due to this material weakness in internal control over financial reporting, our management concluded in our 2012 Form 10-K that our disclosure controls and procedures were ineffective as of December 31, 2012.

In the next paragraph the management reiterates that the internal controls are still ineffective as of March 2013, since the assessment of internal controls and "IT controls" is still going on.

As part of its evaluation, our management has evaluated whether the control deficiencies related to the reported material weakness in internal control over financial reporting continue to exist. As of March 31, 2013, we have not fully completed the assessment, implementation and testing of the changes in controls and procedures that we believe are necessary to conclude that the material weakness has been remediated and, therefore, our management has concluded that we cannot assert that the control deficiencies relating to the reported material weakness have been effectively remediated. As a result, and solely because of the material weakness in internal control over financial reporting disclosed in our 2012 Form 10-K, our CEO and CFO have concluded that our disclosure controls and procedures were ineffective as of March 31, 2013.

And this is what the Auditors had to say about the Internal Controls and procedures. In the latest annual report, page 51, Deloitte has stated that:

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 5, 2013 expressed an adverse opinion on the Company's internal control over financial reporting.

Had this been an isolated incident for this quarter or two quarters, it can be ignored and the company could be given the benefit of doubt. However, the persistence of this disclosure is worrisome to say the least.

The same disclosure and the steps taken to remediate them can be seen on:

1. Q1 2013 (page 29) , Annual report 2012 (page 89)

2. Sep,Q3 2012 (Form 10 Q) (page 30)

3. Jun, Q2 2012 (Form 10Q ) (page 28)

4. Mar 2012, (Form 10q) (page 28), Annual report 2011 (published in Mar2012)

Despite the failure of internal controls identified by end of 2011, here is what the management has to say about the financial statements every quarter:

Management believes that our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for the period ended XXXX fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.

On page 90 of the latest annual report, the management clearly states that:

In addition, certain deficiencies were noted in automated, application and manual business controls and processes that are dependent on controlled access to system functionality and information for their effective operation and, as a result, financial information may not be accurately reflected in key reports or in the general ledger. These IT-dependent controls include controls over the replication of data between IT applications, such as data completeness, input controls and validity checks, which impact our account reconciliations and the preparation of journal entries for certain key accounts.

Based on the nature and interrelationship of the noted deficiencies, our management concluded that these deficiencies, when considered in the aggregate, resulted in a reasonable possibility that a material misstatement in our interim or annual financial statements would not be prevented or detected on a timely basis.

It is surprising that a company that has invested significantly in technology to identify and associate Apple Mac book users with expensive hotels is unable to certify that their ledgers have the accurate financials for approximately 1.5 years.

However it may be noted that the independent auditor Deloitte too has certified that the consolidated financial statements fairly represent the operations/cash flow of the company despite giving an adverse report on Internal Controls.

To conclude, there is a strong possibility that OWW may have to restate the past financial statements due to the persistence of the failure of internal controls. This may have an adverse impact on the stock price.

Source: Company Annual Reports and 10Qs

Disclosure: I am short OWW. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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