First Charter’s SAB 108 Story

From AAO Weblog

Couldn’t go longer than a week without a SAB 108 fix …

As noted in its 10-K, North Carolina-based bank First Charter Corporation adjusted its beginning-of-the-year retained earnings for a passel of accumulated errrors, amounting to only about $2.7 million. That’s only a virtual nick from its opening retained earnings, which totaled almost $324 million. The errors, as usual, aren’t interesting from the standpoint of their size – it’s the nature of the errors that’s more interesting.

The company had over-accrued its mortgage services revenue by $1.7 million (pre-tax) from 2003 through 2006. The error was “due to estimating and accruing for gains on the sale of mortgage loans combined with not reconciling these estimates and accruals to cash received.” That’s a pretty basic control over such an earnings-sensitive area. The firm’s internal control report rightly noted weaknesses in such functions.

The company also understated its accounts payable throughout 2006. Again, it was worth another $1.7 million (pre-tax): it arose because “certain accounts payable items had historically been expensed on a “cash basis” due to the relative dollar amount remaining constant between periods.” A shortcut, but one that took more work in the end, unfortunately.

The remainder of the adjustment related to the under-accrual of salaries and employee benefits. Like the accounts payable errors, the problems related to cash basis treatment of what should have been accrual items.

These problems don’t have the ring of intentional misstatement about them – and in fact, that would be unusual. The SAB 108 adjustments covered in these posts pretty much carry the same message: the internal corporate pressure to report earnings quickly and with as little staff as possible inevitably leads to errors that either need to be corrected or somehow justified as immaterial. If there’s a lesson in the SAB 108 adjustments for investors, it’s not that companies are inherently dishonest or that their CFOs are serial blunderers; the lesson is that firms need to invest in their reporting functions and stop treating them like they’re economic sinkholes. And companies should learn from other firms’ mistakes that accuracy in reporting counts more than speed.

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