Books-A-Million's Horror Story

Since it passed into law in 2002 following Enron and WorldCom, few investors have paid attention to the Sarbanes-Oxley Act, which was intended to smoke out stock market scandals in the making. Maybe it's time we all did.

On Monday, Books-A-Million (Nasdaq: BAMME  ) , which has been singled out as one of the top 10 Motley Fool Hidden Gems Tiny Gems, announced that it would be late in filing its second-quarter 10-Q report with the Securities and Exchange Commission. The reason? Management determined that there were material weaknesses in complying with Sarbanes-Oxley's "Audit Standard No. 2," which defines an auditor's responsibilities in determining whether a company has appropriate internal controls that will produce accurate financial statements.

In other words: Books-A-Million can't yet assure any of us that we've seen the right numbers. Whoops.

Yesterday, things went from bad to worse for the company. Books-A-Million announced that the Nasdaq (Nasdaq: NDAQ  ) may delist its stock from the exchange for failing to file with the SEC in a timely fashion. The company has requested a hearing, but in the interim, you may have noticed that its ticker symbol has changed from BAMM to BAMME, signaling that a move to the Pink Sheets could be in the offing.

Finally, it's worth noting the detective work done by fellow Fool Rick Munarriz last week. The bookseller claimed that Hurricane Katrina was the cause of lowered expectations for third-quarter results, but Rick found that more than a little dubious, especially with same-store sales already trending lower.

Much as I trust the judgment of my Foolish colleagues on the Hidden Gems team, the combination of these events leaves me skeptical. It might just be a buying opportunity. (Two key executives did buy shares in late August, after all.) But I think we're seeing the first few of what could be many chapters of problems for Books-A-Million. Better to put this story down now, before it gives your portfolio nightmares.

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Surprisingly, with all the books he owns, Fool contributor Tim Beyers has never actually been to a Books-A-Million. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what's in his portfolio by checking Tim's Fool profile, which is here. The Motley Fool has an ironclad disclosure policy.


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