There are two words that investors fear inside of public companies:accounting irregularities.  That is what is hitting shares of Canadian Solar Inc. (NASDAQ: CSIQ) this morning.  The company said it was delaying the release of its first quarter results, which was “after regulators subpoenaed company documents on sales transactions and other events in 2009.”  The company was supposed to release earnings today.  It said that its audit committee has hired outside lawyers and launched an investigation on the heels of an SEC subpoena.

The big concern here is that the company said it might revise its fourth-quarter and its full 2009 revenues to recognize sales after receiving payment from some customers and accounting for goods that were returned after periods ended.  If that doesn’t sound like channel stuffing, what does?

If it matters, the company did note that first quarter demand was strong and it has increased foreign exchange risk management via hedging.  The company is also expanding its capacity and work on its wafer plant is expected to add to the coming quarter’s earnings.  Canadian Solar shipped out 186.4 megawatts worth of modules in the last quarter and sees 170 megawatts to 180 megawatts being shipped out this quarter.  It also expects shipments to rise during the second half of this year amid rising profit margins.  The new 2010 outlook for shipments is expected to be 700 megawatts to 800 megawatts rather than the earlier target of 600 megawatts to 700 megawatts. from the prior range of between 600 megawatts and 700 megawatts.

There is still some good news here on the shipments ahead, particularly if the company can raise margins.  Not many companies in the solar sector can pull that trick off.  Still, accounting irregularities are not the best two words for investors.  Most will shoot first and ask questions later.

If this is just over revenue recognition on timing, this will blow over.  If this is over a culture of channel stuffing and accepting returns on top of other recognition issues, then this situation will get much uglier.

Canadian Solar was already weak ahead of the release with shares around $11.85 and then shares went just under $10.00 in Wednesday’s after-hours trading.  This morning we have shares down at $9.58 after an almost-20% drop and the stock’s 3 million shares is already above average volume for a full trading day and it is only 45 minutes into the trading day.

JON C. OGG

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