Cognos’ Cleanup

Another SAB 108 housekeeping cleanup dealing with options, this one from Cognos’ 2007 10-K.

Cognos went the beginning-of-year retained earnings adjustment route to clean up two errors. The first dealt with stock option practices. Like Bed Bath & Beyond, the firm hadn’t discovered its option practice problems until the current year and therefore, could not have applied either the rollover method or iron curtain method all along the years of improper practice. SAB 108 calls for the proper application of just one of them over time if the beginning-year adjustment treatment is to be earned. Cognos did evaluate the problems as far back as 1996 – but it didn’t evaluate them until the current year. All told, it amounted to about a $4 million adjustment.

Cognos also had a revenue issue, not too dissimilar from what had been noted at Apria Healthcare and Lincare Holdings. These firms had basically recognized revenue in full for the month in which they billed a customer, rather than starting the revenue clock running from the date of billing. Cognos was following the same principle in their support service area; upon correcting it, the deferred revenues were pumped by almost $8 million. The net after-tax effect was about $6 million.

Nothing stunning about the size of the corrections, though one might disagree with the finessing of the retained earnings stock option treatment. (From the 10-K, it did sound like the firm was aware of the “off-ness” of the revenues all along since 2003.) What’s curious is the sort of mini-pattern (or just coincidence) emerging in the area of revenues and stock options: looks like firms are only too willing to bury stock option issues as soon as they find them. And it looks like revenue imprecision related to the timing of billing is rather common.

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