S3 (A LONGER TERM PERSPECTIVE) Message Board

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Technology Stocks : S3 (A LONGER TERM PERSPECTIVE)

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May 12 5:00 PM EST

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To: Michael who wrote (8055)	11/21/1997 1:19:00 PM
From: Ken Muller	Read Replies (1) of 14577

Michael: You are correct with regard to the auditors responsibility. Their purpose is to insure the company's financial results are calculated in the same way using the same GATT methods year after year. However, when a substantial restatement occurs (I believe $30 million is substantial), the question arises: did the accounting firm miss a change in the way the numbers were derived or were the numbers themselves in error (e.g. sales with no shipments). In what S3 says was the error, the sales to the distributor channel were errorenously calculated as sales at the date of shipment rather than the date of distributor sale. How would an auditor miss this? He would miss this if he were given the revenue numbers (disty sales and oem sales) which did not reflect the correct amounts. (The OEM numbers were over stated) Any sales to the disty channel should have been excluded from the OEM numbers. This would be an easy item for the auditor to pick up. He would simply review the customer invoice list to make sure none of the standard distributors appeared on the OEM list (You can't hide $30 million in invoices) This isn't looking for fraud. Its making sure S3 is following proper revenue accounting practices. So, either the auditor did not look at the OEM sales list or (this is the way that its usually done) an alternate name for the distributor appears on the the OEM customer list. How would an auditor know it was a distributor? If caught later, the lower echelon people in accounting plead ignorance. It limits liability all around and keeps the CPA firm on friendly terms (It's not nice to intentionally screw around with the CPA firm). So now you know how to play the game. You just have to be a little careful on how you track distributor inventories. This is not incompetence. You have to be very competent to pull this off. Ken

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