Marvell Technology Group Ltd. Slumps as Accounting Firm Resigns

What: Shares of chipmaker Marvell Technology (MRVL 4.06%) slumped on Tuesday following the announcement that PricewaterhouseCoopers, the company's independent accounting firm, has resigned. At 11:15 a.m. Tuesday, the stock was down about 14.5%.

So what: Marvell's accounting woes began in September, when the company disclosed that its Audit Committee was investigating revenue recognition issues during the second quarter. According to Marvell's SEC filing, the investigation was focused on 7%-8% of revenue that was potentially improperly recognized during the second quarter instead of the third quarter. Shares of Marvell tumbled on the news.

The news of PwC's resignation has sent shares falling again, leaving investors wondering how deep the accounting problems at the company truly go. PwC has advised Marvell that it needs to expand the scope of the audit in four areas, according to Marvell's SEC filing:

• the Company's entity level controls, including whether senior management's operating style resulted in an open flow of information and communication to set an appropriate tone for an effective control environment
• the Company's process and controls over establishment of significant and judgmental reserves, including reserves for litigation and royalties
• the Company's process and controls over identification, communication and approval of related party transactions, including assignment of intellectual property rights
• the adequacy of financial reporting resources, including sufficient personnel with appropriate knowledge, expertise and training commensurate with the Company's corporate structure and financial reporting requirements

Now what: Marvell is now searching for a new independent accounting firm, as well as a permanent CFO. Earlier this month, Marvell moved its interim CFO to a SVP-level position, and the company has yet to announce a replacement.

The market has reacted extremely negatively to these accounting disclosures, and for good reason. These revenue recognition issues come at a time when Marvell's revenue is in decline: Marvell's preliminary second-quarter results call for a steep decline in revenue and a big loss. The resignation of the company's accounting firm suggests that these accounting issues will be resolved neither quickly nor painlessly for investors.