Analysts Silent on Levi Errors
When Levi Strauss & Co. restated its earnings Thursday, it became only the latest in a record series of companies to announce that they’d mangled their numbers.
During the first six months of 2003, 158 companies restated their earnings, according to Huron Consulting Group, a nationwide corporate finance firm that tracks such statistics. That blistering pace was outdone only in the second half of 2002, when a record 195 companies restated.
“There has been an alarmingly dramatic number of restatements in the last two years,” said David Nolte, principal at Fulcrum Financial Inquiry, a forensic accounting firm in Los Angeles.
Yet, by and large, industry experts believe that the restatements are a healthy sign -- an indicator that past accounting gimmickry and carelessness are being aggressively addressed and cleaned up. Sarbanes-Oxley, the landmark corporate accounting law passed after the Enron Corp. scandal, is largely the reason, experts agree.
The law demanded that chief executives and chief financial officers personally sign off on the numbers published for investors. If those numbers turn out to be wrong, those top-level executives can be held personally liable.
“When a CEO and CFO must certify that their financial statements are true and correct, there is a heightened awareness of their responsibilities,” said Mike Ueltzen, a Sacramento-based certified public accountant. “Understand, those responsibilities haven’t changed. There is just a stronger desire to make sure that the financial statements are accurate and correct.”
Still, Wall Street takes notice of the type of restatement, said Chris Orndorff, portfolio manager at Los Angeles investment firm Payden & Rygel.
When companies restate because they’re digesting an acquisition or trying to conform with a new accounting rule, it’s considered less troublesome than when companies come out with a restatement related to misstating past revenue or profit, he said.
“It speaks poorly to management credibility” when the restatement calls the company’s accounting practices into question, Orndorff said. “In this environment in particular, management credibility is more important than ever.”
In the case of Levi, accounting experts were reluctant to comment on the San Francisco jeans maker’s restatements. The company said it would reduce earnings for the third quarter and for 2001 by more than $30 million because it discovered clerical errors on its 1998 and 1999 tax returns. In those years, Levi said it mistakenly took the same tax deduction twice for losses related to plant closures.
Still, Levi’s disclosure added more fuel to critics’ concerns about the highly leveraged company, which has been struggling to improve sales. Privately held Levi carries about $2.3 billion in publicly traded debt.
The company is facing a wrongful-termination lawsuit by two former employees who worked in Levi’s tax department.
Meanwhile, Levi and the Internal Revenue Service are in negotiations over tax returns dating to 1986. It was during a review of the 1998 and 1999 audits that Levi found it had double-booked tax deductions.
Many experts believe restatements will begin to taper off by next year because companies will have had sufficient time to digest the changes mandated by the law and verify past numbers.
“What I hope is that managers are coming clean, trying to be more conservative and to err on the side of more disclosure rather than less,” Orndorff said.
