UTStarcom Warns of Possible Sarbanes-Oxley Delay

UTStarcom's (UTSI) accounting problems got a little messier Monday.

The maker of close-range wireless networks said it is expanding a review of its internal controls. The move came as the company restated second-quarter numbers and warned that its top executives may not be able to sign off in timely fashion this year on the company's financials.

The bookkeeping tangle at the Alameda, Calif., provider of personal access communications systems started to unravel last week, when the company filed with regulators for a five-day extension on its quarterly report. The company sought the delay after it found a questionable $1.9 million transaction.

On Monday, UTStarcom filed the 10-Q, saying a probe of similar deals going back five quarters had shown the problem to be an isolated incident. The company said it hadn't included the deal in second-quarter revenue as reported July 27, so no restatement was necessary on that count.

But the company also said that a broad review of its internal controls showed "certain control deficiencies exist related to the review and evaluation of criteria related to revenue recognition." Specifically, UTStarcom said it found problems related to inventory control. The company said it would restate second-quarter earnings to add a penny to the latest quarter's bottom line, after reversing part of an inventory writeoff.

UTStarcom said its 10-Q filing will reflect revised gross margins of 25.6% and earnings of 33 cents a share. When the company posted second-quarter numbers last month, it showed gross margins of 25.4% and earnings of 32 cents a share.

UTStarcom said that to bring that problem under control, it will have U.S. corporate management review all non-China revenue, demanding greater documentation of all deals. The company will also limit local contract authority and take greater control of inventory balances.

But UTStarcom said that fully implementing section 404 of the Sarbanes-Oxley by year-end could pose a problem. Section 404 requires management to explicitly take responsibility for establishing and maintaining an adequate internal control structure.