Someone Hasn’t Been Doing Their Homework – NEC Voted Off the Island

Posted by Myrna Moss, Sep 27, 2007, 1:42pm

NEC_logo.pngFiling annual reports and auditing financial statements according to US GAAP standards is excruciating for all public companies but for NEC electronics, it’s become a debilitating factor in their American depository receipts trading on our exchange.

The company formerly known as Nippon Electronic Company’s ADRs will no longer be traded on the Nasdaq as of today. Not only are they unable to file their Form 20-F for the fiscal year rounding up in March ’06, they announced their US filings dating back to 1999 are unreliable.

According to a report by CNN Money, the NEC said a restatement (of their annual report) "is not practicable" because of the complexities involved in determining the necessary adjustments. We previously reported that the Europeans are also taking issue with our accounting principles and filing standards and realize we’re seeing a trend here.

Are our accounting standards REALLY that difficult? Is this our problem or theirs? Have our accounting rules become so arcane they're driving companies away from us? A bunch of you have your CFA designation – tell us what’s going on here.

Nasdaq Takes Step to Delist NEC Corp. [Wall Street Journal]

NEC Will Not File Fiscal 2006 Report [CNNMoney.com]

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Posted in: Delisting, Nasdaq, SEC

Comments

Posted by AJ, Sep 27, 2007 2:00PM

Did you even bother reading the WSJ article? NEC's accounting is a mess and as the article points out they were caught playing with their numbers earlier this year. As awful as Sarbox is, this seems like its all due to NEC being broken.

Posted by CFA Designation, Sep 27, 2007 2:48PM

Yeah, I always ask a CFA about GAAP accounting.

Posted by Sandy, Sep 27, 2007 3:23PM

I'm no CFA, but I did work at an accounting standard-setting body for a year after grad school and was in public accounting for 3 years after that. Don't know if that qualifies me, but here's my one pence:

1.) Yes, GAAP is quite complicated. See FAS 133, FAS 140, FIN 46, etc.
2.) So is IFRS (foreign GAAP). Their "principals-based" standards are only marginally less arcane.
3.) In 5-10 years, there will be no difference between the two. I suspect the FASB will be the one to go.
4.) If you can't figure out how to apply the standards, hire smarter accountants.
5.) If they can't figure it out, hire a lawyer.

Posted by , Sep 27, 2007 4:25PM

CFA != CPA

Posted by Rick, Sep 27, 2007 4:30PM

Here comes the judge.

Sue everyone.

Btw. I have lost real money

Posted by Rick, Sep 27, 2007 9:18PM

I am going to court on this one.

NEC is one of the largest companies in the world. The Nippon Electrical company. The ATT of Japan.

I am going to sue the bastards. They claim they are the only company to "not understand" the rules.

See you in court.

Posted by Brad, Sep 30, 2007 12:45AM

Quite frankly, NEC must hire really stupid accounting managers and lawyers. The fact is, the complexities that NEC claims are making filing in the US difficult usually boil down to:

- Derivative Valuation
- Revenue Recognition for non-standard transactions.
- Tax treatment (FAS 109)
- Pension/Post-Retirement Benefits Valuation
- Employee-based compensation.
- Foreign Exchange Transaction and Translation Adjustments.
- Off-Balance sheet financing

Now - here is the deal. NEC is stating what they are stating NOT because they cannot comprehend the accounting for those transactions. They are in trouble because the information systems they have in place are inadequate to allow them to comply with US-GAAP.

I have a feeling a big problem is the inability of NEC's multiple units to communicate consistent, reliable and relevant financial data so that they could apply the US - GAAP standards appropriately. Now, to be fair, IMHO, this is a problem in part due to the inability of sometimes even recently developed Business/Accounting Information Systems to become obsolete as new and ever-more complex transactions are entered into by these large, multi-national corporations.

To give you the idea of the complexity of what NEC is likely facing:

NEC (Parent), owns a Subsidiary in Australia (Sub 1) which owns a subsidiary in New Zealand (sub 2). The NZ sub, has purchased a derivative for hedging purposes. So now, the Company needs to deal with the valuation issues both for the derivative purchase (FAS 133) as well as the initial temporal method translating of New Zealand Sub financials into Australian sub financials, and then use the current method to translate the financials into Japanese Yen. Oh, and then you need to translate that in US Dollars for SEC reporting purposes. Assuming you have perfectly constructed database systems, and you can easily compile and analyze the data, this would be a daunting task.

Now, imagine you have AIS systems that were not designed to provide information or analysis as to whether or not your derivatives qualify for FAS 133 Hedge Accounting, as well as the fact that you have multiple systems, each with separate databases in which data is difficult to compile for centralized reporting. Well – you can see how this could become a serious issue.

People complain about the complexity of the accounting rules, but, this is only due to the immense complexity of the types of transactions that can be entered into. Add to that, that the types of financial instruments are evolving at a rapid pace, and you can see how large, bureaucratic entities have a difficult time getting the information needed to ensure compliance with accounting rules. If every entity could be assured of getting relevant data from their databases, compliance would be much, much easier.

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