Greater Atlantic Financial: Inter-company Accounts Settled

From AAO Weblog

Savings & loan Greater Atlantic Financial Corporation issued a non-reliance 8-K filing on December 26, neutralizing its financial statements for for the quarterly periods ended December 31, 2005 and March 31, 2006 and for the
years ended September 30, 2004 and 2005.

The firm’s audit committee found that “losses aggregating approximately $1.4 million discovered in the Company’s previously reported investigation into an unreconciled inter-company account at Greater Atlantic Mortgage Corporation” caused the flaw in the presentation of the firm’s financial position for those periods. The unreconciled inter-company account was discovered during the review of closing entries to the accounts of Greater Atlantic Mortgage Corporation when the June 30, 2006 financials were being prepared. The warehouse account maintained by Greater Atlantic Mortgage Corporation with another of GAFC’s subsidiaries “had not been properly reconciled.” Greater Atlantic Mortgage Corporation ceased operations, effective at the end of the prior quarter.

Interestingly, the audit committee found that “the losses were sustained in Greater Atlantic Mortgage Corporation’s warehouse account over a period of five years.” However, “the loss in any given year did not reach a material amount such as to require restatement.” The committee believed that the cumulative errors were material enough to warrant restatement for last two years, though.

A couple of take-aways. One: now that the SEC’s guidance on error correction is out there in the public domain, we might see more self-examination and corrections take place. The new SAB 108 will probably provoke more confessions about unaddressed known errors that may have existed for years.

Take-away two: Kudos to GAFC for wrestling their problem to the ground. On the other hand, that problem existed for five years, and involved a very basic accounting process: reconciling two intercompany accounts so that they’re in synch with each other. Failing to settle them properly over five years indicates poor internal controls. GAFC has a market cap on the order of $13 million, and so is exempt from the Section 404 provisions – the ones that the Paulson committee recommends should be waived for small fry. The SEC’s Accounting & Auditing Enforcement Releases are chock full of wayward small companies – and if a SAB 108 movement gets underway, it’ll be interesting to see if there’s even more evidence that the Paulson committee is flat-out wrong.

http://www.accountingobserver.com/blog/