This article has been corrected to reflect the fact that these revenues were not included in the company's financial press release. We regret the error.

Wireless communications company UTStarcom (NASDAQ:UTSI) plunged nearly 15% today as investors reacted to the company's decision to request a five-day extension from the Securities and Exchange Commission in filing its quarterly report, or 10-Q.

UTStarcom noted that a review of its second quarter had uncovered a $1.9 million equipment sale that should not be recorded as revenue.

UTStarcom notified its internal audit committee of the problem, and its review is going to look into the procedures that allowed this sale to be recorded. The problem, the company stated in a release, had to do with a single sale that did not meet the requirements for recognition within the quarter. UTStarcom's internal audit has yet to be completed, and as such the company asked the SEC for the delay.


For those less familiar with accounting, here's generally what this means. Companies have some leeway in determining when and how they can record revenues. There was plenty of hue and cry in 2000 over Priceline's (NASDAQ:PCLN) decision, for example, to count the value of the underlying tickets and services it sold as its own revenue. Companies can follow any one of several guidelines -- some aggressive, some not, -- but they must identify the guidelines they follow in advance. So if a company says it's going to record revenue the moment a customer pays for its goods, any payments received in that quarter will count. If it counts revenue when its goods are shipped, any goods shipped within the quarter will count. If it only counts sales as being economically meaningful when a customer confirms receipt of goods, then -- well, you get the idea.

What happened here is that UTStarcom found a fairly sizable sale that did not meet the standard of recognizable revenue for the quarter that it set for itself. Shouldn't be that big of a deal. Unless...

Unless what the company finds in its audit isn't a single event, but a pattern of revenues that have been recorded improperly, signifying that UTStarcom has poor grasp over its internal financial controls. If this turns out to be the case, the company has a big problem. That's what the market is nervous about, that one such problem is the harbinger for plenty more.

A month ago, I highlighted UTStarcom as a technology stock that was fairly cheap. While this is yet another uncertainty to be piled on top of the company, it didn't warrant the shellacking the shares suffered.


Bill Mann does not own shares in any company mentioned in this article.