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The Green Sheet Online Edition

December 26, 2007 • Issue 07:12:02

VeriFone vows to fix faulty accounting

On Dec. 3, 2007, VeriFone Holdings Inc. disclosed that accounting errors had skewed 2007 net revenue reports, causing volatility among its investors on Wall Street.

VeriFone said its accounting errors were related to overstatement of inventory and the misvaluation of manufacturing and distribution overhead. This caused the company to overestimate the size of its inventory and underestimate its costs. Based on its faulty figures, VeriFone believed its profit margins were higher than they actually were.

According to VeriFone Chairman and Chief Executive Officer Douglas G. Bergeron, the errors only surfaced early in the last week of November 2007 and involved the double entry of shipments from VeriFone's international headquarters in Singapore to its main distribution center in Sacramento, Calif.

Once these errors surfaced, VeriFone did a more extensive review of its operation and discovered more errors in double-booking of overhead in Sacramento; Tel Aviv, Israel; and other smaller distribution centers.

Based on this review, VeriFone expects to reduce previously reported inventories by approximately $7.7 million, $16.5 million and $30.2 million for the first three quarters of fiscal year 2007, which ended for VeriFone Oct. 31.

As a result, VeriFone's restated earnings statement — which is set to be released in January 2008 - will reflect a decrease in its actual pretax income by $8.9 million, $7 million and $13.8 million for the comparable three quarters. The largest reduction in the size and value of its inventory is for the third quarter since, according to Bergeron, the largest amount of accounting errors occurred in the previous quarter.

In a Dec. 3 conference call with analysts, Bergeron characterized the mistakes as "a huge black eye" for the company. But he said, "We are confident that we have isolated the problems in our systems and in our accounting. We are also confident that this issue did not exist before fiscal year '07." In addressing why these accounting errors occurred, Bergeron conceded that the "increasing order of complexity" of the company may have been a factor.

As reported in The Green Sheet, VeriFone acquired the Tel-Aviv-based POS terminal manufacturer Lipman Electronic Engineering Ltd. in November 2006. According to Bergeron, that merger gave VeriFone a 65% market share in the U.S. payment systems market. (For more information, see "VeriFone + Lipman = very big footprint," The Green Sheet, Nov. 13, 2006, issue 06:11:01.)

But the move may have outpaced VeriFone's ability to handle the complicated supply chain dynamics. Analysts have noted that due to the complexity of combining the two businesses, VeriFone could not track its inventory solely with its automated system, but instead its cost accounting group had to enter the data manually, which led to the double-booking errors.

But Bergeron is convinced the acquisition of Lipman was the right move for VeriFone strategically. Still, Bergeron conceded the accounting errors were "unacceptable, and we're going to fix it and fix it fast."

In response to VeriFone's Dec. 3 statement, a class action lawsuit was filed Dec. 4 in the United States District Court, Northern District of California on behalf of investors who purchased stock in the company between March 1 and Nov. 30, 2007.

The complaint alleges the San Jose, Calif.-based POS terminal maker, Bergeron and VeriFone's Executive Vice President and Chief Financial Officer Barry Zwarenstein violated federal securities laws by knowingly publishing false and misleading statements about the company's earnings.

But Credit Suisse Financial Analyst Paul Bartolai said in a research note that "these issues seem to have taken management completely by surprise, and we do not believe there is a more sinister plot here."

Regardless, the company's stock has taken a hit. On Nov. 30, VeriFone's stock was valued at $48.03 per share at closing. The following Monday, Dec. 3, its stock had plummeted 22 points to close at $26.03, representing a 45% decrease in its value. It bottomed out at $19.13 in the early trading day, Dec. 7.

But business goes on for VeriFone: After this snafu came to light, the company acquired the electronic funds transfer and POS services business of Australia's Peripheral Computer Industries to bolster its one-stop electronic payments products and services. end of article

The Green Sheet Inc. is now a proud affiliate of Bankcard Life, a premier community that provides industry-leading training and resources for payment professionals. Click here for more information.

Notice to readers: These are archived articles. Contact names or information may be out of date. We regret any inconvenience.

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