Innocent accounting errors could open other doors

Implications: Over the past several years, companies by the dozen have made uncalculated errors in reporting. Most recent is the option backdating cases. While these missteps have cost these companies millions of dollars in outside help, it has also brought into question the true value of the companies. Don’t expect this deal to be the last privatization among those viewed through the magnifying glass.

Analysis: Over time, companies are bound to make errors in determining quarterly and annual results. After all, GAAP guidance is written for interpretation. On the rare occasion that these errors are uncovered to reveal mass correction, opportunities arise. In the case of OSI, improper accounting treatment caused a major investigation, costing the company in investigating their trouble, causing Wall Street to question valuation. While the analysts were scrambling to revalue and outside help worked to quantify the problems, potential investors have took a keen eye to determining the true value of the company. Could this happen with some of the option cases hitting the headlines on a daily basis?

This is not to say the accounting errors with OSI were deliberate. GAAP rules are complex and can sometimes be misinterpreted. The scenario, however, lends itself to potential avenues. While dozens of companies spend millions of dollars determining their errors in option valuations and stock valuations fluctuate, outside investors could be scouring through records to determine undervalued companies. Rumors are flying around several companies caught in this picture. It will be interesting to see if and how many companies over the next 24 months are taken private and what the correlation is with recent accounting troubles. Even further, how many privatization deals involve insiders.