Assignment 1: Financial Statement Restatement and Ethics Due Week 3 and worth 20
ID: 2402114 • Letter: A
Question
Assignment 1: Financial Statement Restatement and Ethics Due Week 3 and worth 200 points Search the Internet or Strayer databases for a company that recently restated its earnings. Based on the company researched and identified: Write a two to three (2-3) page paper in which you: 1.Assess the factors that contributed to the financial statement restatement, signifying the executive management team’s attitude toward the restatement. Suggest how the restatement may have been avoided during the initial reporting process. 2.Explain the impact to the company’s stock price when the restatement was released and to future earnings forecast, indicating whether or not you believe the impact to the stock price was justified. 3.Evaluate the restatement in terms of management’s ethical violations according to the requirements of the Sarbanes-Oxley Act, providing recommendations to management on how to avoid these problems in the future. Provide support for your recommendation
Explanation / Answer
The company that I have selected is Cubic Corporation – an American public corporation that provides services to defense markets and transportation markets on a global scale.
1. Cubic Corporation had several factors that contributed to the financial restatement in 2014. One of the major factors was their use of the cost-to-cost percentage-of-completion method of accounting, modified by a formulary adjustment. Under this method, “sales and profits are based on the ratio of costs incurred to estimated total costs at completion. Cubic has consistently applied a formulary adjustment to the percentage completion calculation for development contracts that had the effect of deferring a portion of the indicated revenue and profits on such contracts until later in the contract performance period.” (Release, 2014) GAAP accounting principles differ in there is no use of a formulary calculation to defer a portion of the indicated revenue and profits on such contracts. Cubic came to the conclusion that even though the accounting practice they were using was a variation of GAAP, they decided to not only correct but change the way they recognized sales and profits. “Cubic believed that sales and profits should have been recognized based on the ratio of costs incurred to estimated total costs at completion, without using a formulary adjustment (Release, 2014).” This was a major factor that impacted the restatement of the financial statements.
Executive management team’s attitude toward the restatement was supportive and wanted the amendment to their annual and quarterly SEC filings, to happen as soon as reasonably expected. They concluded the company’s “internal controls over financial reporting and disclosure controls and procedures were not effective to a reasonable assurance level as of the ends of each of the periods covered by the restatement (Release, 2014).” Cubic’s management team has made the attempt to address the internal controls weaknesses and make the changes necessary to better produce financial statements.
2. The impact to Cubic Corporations stock price after the announcement of restating financial statements created immediate declines. Shares had been as low as 20.75 in 2008 and as high as 57.42 in April 2011. But on February 10, 2014 Cubic Corporation announced the restatement of financials details, shares began to decline from 54.00 to as low as 42.00 per share in July.
“On August 1, 2012, Cubic Corporation announced that the Audit Committee of the Board of Directors of Cubic Corporation, after consultation with Ernst & Young LLP, determined that Cubic's financial statements for the fiscal years ended September 30, 2011, 2010 and 2009, the quarters ended March 31, 2012 and December 31, 2011, and each of the prior quarters of 2011 and 2010 can no longer be relied upon as being in compliance with generally accepted accounting principles. Cubic Corporation said it will restate such financial statements. Shares of Cubic Corporation (NYSE:CUB) closed on August 2, 2012, at $48.01 per share.” (Daniels, 2014)
The changes resulted in an increase in revenues and net income cumulatively over the period of the restatement and an increase in retained earnings as of March 31, 2012. One year after the announcement of reinstatement of the financials, the company is sound once again. On February 24, 2015 Cubic Corporation announced its Board of Directors has declared a cash dividend of 12.5 percent increase on common stock. “I am pleased to announce that due to Cubic’s financial strength and commitment to deliver long-term value to our shareholders, we are increasing the dividend by 12.5 percent while continuing to invest in the future growth of our businesses,” said Cubic’s President and Chief Executive Officer, Bradley H. Feldmann. (Hatcher, 2015) The impact the reinstatement has had on the stock prices, in my opinion, seems fair in regards to all the projections and the late filings. Stock investors are going to have the wait and see attitudes to make sure the projections where truly in their favor. However, had the revenue and net income decreased there would have probably been a greater decline in the stock prices.
3. Under Section 404, companies are required to establish internal controls and procedures for financial reporting. Another section mandated that both the chief executive and chief financial officer personally attest that they have reviewed the auditors’ report and that it does not contain any material untrue statements or material omission or anything that could be considered misleading. In the case of the Cubic Corporation, they had weak internal controls and where not compliant to GAAP. Management can avoid this in the future by analyzing financials, correcting the misstatements and then addressing the internal controls. Whether it is hiring a better accounting staff or advancing their internal auditing system, this will help get them in a better financial reporting stature for the future.
References
Daniels, M. (2014, February 12). Cubic Corporation (NYSE:CUB) Investor Investigation Over Possible Securities Laws Violations. Retrieved July 18, 2015, from Shareholders Foundation: http://shareholdersfoundation.com/caseinvestigation/cubic-corporation-nysecub-investor-investigation-over-possible-securities-laws-vio
Hatcher, S. (2015, February 24). Cubic Corporation Increases Semiannual Dividend by 12.5 Percent . Retrieved July 18, 2015, from Cubic Website: http://www.cubic.com/News/Press-Releases/ID/1175/Cubic-Corporation-Increases-Semiannual-Dividend-by-125-Percent
Release, P. (2014, February 10). Cubic Corporation to Restate Financial Statements. Retrieved July 18, 2015, from Market Watch Website: http://www.marketwatch.com/story/cubic-corporation-to-restate-financial-statements-2014-02-10