January 2, 2008 3:53 PM
Lots of little errors add up at EchoStar
Make the same mistake each year, and it starts to add up.
EchoStar acknowledged that this year, albeit obliquely, when it recognized nearly $100 million worth of past errors.
This story would have been completely unreported were it not for Audit Analytics, a research firm that has just released a report on the adoption of SAB 108, a directive from the Securities and Exchange Commission.
SAB 108 required companies to apply new tests to past errors to decide whether the cumulative effect of the mistakes was material. If so, the company needed to correct them.
But there was a gift in the new rule: Companies did not have to tweak their bottom lines when correcting the errors. Instead, companies could make an adjustment to their shareholders' equity without ever running the number through the income statement.
EchoStar revealed in its 2006 annual report filed last March, that it had been making errors in the way it recorded payments to its vendors. The financial statements reflected 12 months' worth of payments, but "each 12-month period included several days or weeks from the prior calendar year," the company said.
Continues the company:
This discrepancy between our calendar and fiscal year for certain vendor accruals was immaterial to prior years’ consolidated financial statements. However, the growth of our subscriber base over the past 10 years has increased this discrepancy resulting in a cumulative increase to opening accumulated deficit of $78.4 million for programming obligations and $21.3 million for other vendor obligations.
After an adjustment for the tax benefit for this charge, the company had a $62.3 million increase in its accumulated deficit. (Accumulated deficit is the opposite of shareholders' equity - when a company loses money year after year, shareholders' equity is negative.)
It was the fourth-biggest negative restatement among the 200+ companies Audit Analytics examined. EchoStar posted net income of just over $608 million in 2006, which meant the adjustment would have wiped out more than 10 percent of reported profits had the SEC forced companies to take the adjustment in the income statement.
EchoStar was fortunate. Instead, it included the change in the least-viewed part of the financial statements - The consolidated statements of changes in stockholders' equity (deficit) - and discussed it in three paragraphs in the New Accounting Pronouncements section. It never issued a press release, to be sure, and the massive correction has been unnoted - until now.
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