The fact that Micromuse (NASDAQ:MUSE) will restate four years of financials is far more important than the facts in the restatement.
Yesterday, the San Francisco-based information technology company announced that it would delay release of its 10-K. More than likely this was not a shock to most investors, as the 10-K was due to be released the previous day. What may have been a shock is that Micromuse had discovered discrepancies in its expense recognition accounts that required the restatement.
In most situations when results are restated, the knee-jerk reaction is the most prudent -- get the heck out of the stock, as soon as possible. There are a few attenuating circumstances to the Micromuse restatement, however, that allow me to say that this is most likely not a huge deal.
First, Micromuse called shenanigans on itself. In the company's conference call yesterday (transcript courtesy of CCBN), CFO Mike Luetkemeyer noted that the inquiry began internally in September when some questions arose over expense accruals. In response, the company brought in outside forensic accountants, found the problems, determined a restatement was necessary, and announced it.
There's no SEC investigation, no change in cash in the bank, no issues with revenues being over- or understated, and the restatement is unlikely to be that great. When an analyst pressed on the cause of the bad accounting, Luetkemeyer admitted that, with the company's rapid growth and then contraction during the time periods involved, "some of the internal disciplines broke down."
Second, the types of adjustments to be made appear fairly benign. Were the company's revenues or cash accounts in question, there would really be only one appropriate place to watch this unfold -- from the sidelines.
That said, any restatement, especially one that encompasses such a long period, is a big, big deal. Generally speaking, restatements of financial results are the product of a company pushing too hard to show good results, or of sloppy internal controls. Neither is a good thing.
As we have seen over and over with bigger companies such as Tyco (NYSE:TYC), MCI, and others, until an investigation is complete, one can't be sure that it won't yield evidence of additional problems, ones that may even be more serious than those originally disclosed. Micromuse investors must understand that, while the known facts of the matter indicate that the potential for additional issues appears low, we do not have all the facts.
Micromuse will incur about $2 million in "previously unanticipated professional fees and expenses related to the accounting inquiry," basically the costs of additional outside accountants and lawyers. Also, since we're talking about expenses, the profitability measures for Micromuse are going to change, going back four years. While they talk about cash and revenues not changing, profits for the time period will have to be adjusted.
Given the information we have, I'd suggest that balance when viewing the facts of the restatement as we know them is in order. The details seem not to be horrible. On the other hand, just like it's impossible to be a little bit pregnant, a restatement is something that investors ought to look at with trepidation, no matter what.
Bill Mann is the editor of Stocks 2004 , a collection of The Motley Fool's best stock ideas for the upcoming year.
