InterDigital Inc (IDCC)

[blueskywaves]

From October 2002....


Howard Schilit Takes On Nokia
By Kenneth Li
Senior Writer
10/25/2002 05:27 PM EDT

Accounting guru Howard Schilit is taking on Nokia, charging the world's largest wireless phone company with employing questionable accounting methods that boosted third-quarter revenue.

Schilit's firm, the Center for Financial Research and Analysis, released a report criticizing the handset maker for its "subjective revenue-recognition method" regarding sales of third-generation wireless-network equipment.

As a result, the report said, Nokia was able to report that quarterly sales rose 2.5% to 7.22 billion euros ($7.04 billion), after declining for four consecutive quarters. Excluding the 430 million euros in revenues related to 3G equipment, the company would have reported a decline in sales of 3.6%, or 6.79 billion euros, according to Schilit's calculations.

Nokia spokesman Keith Nowak defended the company's accounting, saying Nokia had disclosed its revenue-recognition criteria as far back as September 2001, when it first started shipping equipment to its approximately 30 carrier customers. These customers include Finnish carrier Sonera (SNRA-Nasdaq) , U.K.-based Hutchison Telecom and Italian operator Wind. "This shouldn't be a surprise for anyone," Nowak said. "We've been saying this for a year."

Revenue related to new network equipment -- which consists of base stations and radios that transmit phone calls and wireless data -- is recognized in terms of technology milestones, he said. For instance, the first stage of revenue related to the company's 3G technology was recognized, or considered an actual sale on the income statement, at the end of the third quarter after the successful live testing of a new network, he said.

Schilit criticized the company for this practice, saying it makes revenue figures hard to verify as an outside observer. "With technological milestones as revenue-recognition triggers, we note the difficulty that an outside analyst faces in determining the appropriateness of the company-defined technological milestones in addition to confirming that such milestones have indeed been met."

Schilit added, "As such, CFRA considers this revenue recognition to be more subjective and susceptible to management discretion."

However, Samuel May, a wireless-equipment analyst at U.S. Bancorp Piper Jaffray, said the practice of recognizing revenues through milestone targets is commonplace in the wireless-equipment industry. Nokia's revenue-recognition method is "not an issue," he said, noting that the practice is common among competitors such as Ericsson (ERICD-Nasdaq). "It's no different than what they've done before. It's not like they've changed the rule midway," he said.

Schilit, a former accounting professor, is no stranger to controversy. He has been dubbed by market watchers as the Sherlock Holmes of Wall Street and the most hated man on Wall Street. He reportedly spotted financial red flags in Enron's books as early as 1995.

Nokia's American depositary receipts closed the day up 74 cents, or 4.6%, at $16.89.

http://aol.thestreet.com/tech/kennethli/10050472.html

From the SEC............

Many have asked why we issued SAB 101. The answer to this question is very simple: Revenue recognition is an issue that surfaces in a significant number of the Commission's enforcement cases and is the largest single issue involved in restatements of financial statements.

For example, a March 1999 report entitled Fraudulent Financial Reporting: 1987-1997 An Analysis of U.S. Public Companies, sponsored by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission (the COSO Report), indicated that over half of financial reporting frauds in the study involved the overstatement of revenue.

Recent enforcement cases, including those involving Sunbeam, which I'll touch on later, Microstrategy, and Livent, just add to the long list of enforcement actions alleging improper revenue recognition. Based on research performed by my office, restatements for revenue recognition also result in larger drops in market capitalization than any other type of restatements. Furthermore, the issuance of SAB 101 was part of an extensive, coordinated effort to combat abusive earnings management practices, which were first highlighted in a speech by former SEC Chairman Arthur Levitt in September 1998.

http://www.sec.gov/news/speech/spch495.htm

IDCC was one of the first companies to implement SAB 101.