Applied Signal Looks Back

From AAO Weblog

In a non-reliance 8-K filed yesterday, Applied Signal Technology joined the long look back crowd.

The firm will be slapping the nonreliance label on its financials issued between 2000 and 2005; it intends to make a catchup cleanup in its 2006 financials, to be issued late. The root of the problem was:

“In connection with the option grants to newly-hired non-officer employees, we used improper measurement dates as to some of these grants because the grant price was associated with a date prior to the employee’s respective date of employment. We used an improper measurement date as to the annual grant made to non-officer employees on November 18, 1999, because the number of shares individual employees were entitled to receive was not determined until after the original grant date, and therefore the measurement date for such options was subsequent to the original grant date. Because the price at the originally stated grant date was lower than the prices on the actual dates of determination, we determined we should have recognized additional stock-based compensation expense for each of these grants.”

(Probably one of the clearer explanations of a dating problem given by any company so far.)

The firm hasn’t yet reached a final determination of the entire extent of its problems: the total effect of the restatement adjustments “is expected to result in a decrease in retained earnings for the year ended October 31, 2004 of approximately $1.0 to $1.7 million.” Back then, Applied Signal’s stockholders’ equity was about $89 million, so it’s actually more significant than it sounds at first.

What was most interesting was that the issue arose “[I]n connection with our review of our financial results for the fiscal year ended October 31, 2006…” Last year, the firm received a clean opinion from auditors Ernst & Young on both the financial statements and internal controls. This year, with the heightened awareness about flawed APB Opinion 25 accounting, the past financials got a more-thorough vetting. You have to wonder if if this is going on at many other firms at the 11th hour of their year end review. We’re seeing this now with Applied Signal Technology because its 10/31/06 10-K was due; will we see the same thing happen around March 1 for the December year end filers? Stay tuned.

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