For the second time in two weeks, computer services company Electronic Data Systems (NYSE:EDS) has postponed releasing its quarterly earnings numbers because of a disagreement with its auditors over how much to write down the value of its contract to upgrade computer systems for the U.S. Navy. It looks like shades of McAfee (NYSE:MFE), folks. If you recall, the series of earnings restatements that that firm put out over the past couple of years gave it such a bad reputation that the company up and ditched the name used in most of those restatements -- Network Associates.
Now, EDS may not be in as dire straits as Network Associates, er, McAfee, but its situation is still pretty grim. A few months back, Nathan Slaughter pointed out that both Moody's (NYSE:MCO) and McGraw-Hill's (NYSE:MHP) Standard & Poor's are pondering downgrading EDS's debt. Just yesterday, investors dropped the stock about 5% in after-hours trading after getting the news of EDS's repeat-delay in releasing earnings.
The size of the drop, after the earnings release had already been delayed once just a week or so ago, was probably due in large part to the new revelation that EDS's auditor also questioned how the company calculated bonuses in 2003 and 2004. Perhaps a more important factor, EDS's admission that in addressing the auditor's concerns, it might be necessary to restate some of its 2003 quarterly earnings reports.
But here's a Foolish idea to ponder: McAfee's multiple restatements were pretty significant in size because they related to how the company recognized its revenues. In contrast, an EDS restatement that relates just to bonuses for executives should be relatively minor in size and will almost certainly involve an amount less than the $500 million in market cap that EDS lost in last night's decline. Buying into the company on this news might actually be a justified gamble -- especially if the stock enjoys a rebound similar to the one McAfee enjoyed during the days when investors were afraid to invest in a company whose SEC filings had lost the public's trust.
For more on EDS's troubles, read:
Fool contributor Rich Smith owns no interest in any of the companies mentioned in this article.
