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Bad News Monday for LCC International

Late with its filings and dumped by KPMG, LCC International gets a delisting warning from Nasdaq and must wait for another company's restatement be...
Marie LeoneAugust 20, 2007

It was no surprise for officials at LCC International Inc to be formally notified Monday that Nasdaq is considering delisting the company’s stock because of its late regulatory filings — the company had announced in April that it would miss the filing deadline for its 2006 10-K. The company, which provides wireless voice and data services to telecommunications companies, has also failed to file its most recent quarterly report, and said a week ago that it expected the Nasdaq warning.

It was also not a surprise Monday that Wireless Facilities, whose engineering services business LCCI acquired in June, announced the conclusion of its investigation into stock option fraud and backdating. That will delay Wireless Facilities own financial results — including information LCCI needs to get its own books straight — until September 10.

Still, both announcements come as further blows to a company that has weathered a perfect storm of financial reporting difficulties, including problems with its internal controls and the May resignation of its auditor, KPMG.

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In April, when the company announced the delay of its annual report, it explained that management needed more time to complete its assessment of the effectiveness of its internal controls over financial reporting, as mandated by Section 404 of the Sarbanes-Oxley Act. That delay also pushed back the timetable for the independent auditor’s testing and review of the company’s internal controls.

LCCI’s independent auditor, KPMG, had cited the company in 2004 and 2005 for deficiencies related to controls over revenue recognition accounting. It is unclear if similar issues are being blamed for this year’s tardy filing, or if the late filings and deficiencies are behind KPMG’s recent resignation as LCCI’s independent auditor. LCCI did not immediately return phone calls asking for comment.

According to regulatory filings, LCCI’s board of directors began discussing the audit committee’s “desire to cease using KPMG” on April 24th, and debated the “optimal timing” for firing KPMG. But it seems that KPMG beat the company to the punch, sending its resignation letter to LCCI’s audit committee on May 2. On that same day, LCCI’s audit committee met and approved a resolution to begin looking for a new independent auditor.

In fact, KPMG still works for the firm, since the auditor said it would remain until the completion of the 2006 audit and assessment. But on May 8, LLCI announced that it did not expect to have a new auditor in place in time to complete its Form 10-Q for the first quarter of 2007 on time, an announcement which effectively led to the most recent Nasdaq delisting warning. In the same filing, LCCI officials pointed out that KPMG cited the company in 2004 and 2005 for internal control problems.

Specifically, KPMG noted that LCCI restated its consolidated financial statements for the year ended December 31, 2004. In addition, KPMG issued an adverse opinion for the internal control assessment for 2004 and 2005. Specifically, the audit firm found a material weakness regarding the company’s procedures and policies related to accounting for fixed-price customer contracts.

The auditors explained that the contracts, which are booked using a “percentage-of-completion” accounting method, are not reviewed by personnel with a sufficient technical expertise in this area. As a result, there was a question about whether the appropriate “percentage-of-completion” charge was being recorded as revenue, and whether the accounting fell within the confines of generally accepted accounting principles. What’s more, KPMG noted that as a result of the lack of accounting oversight and review, material misstatements were identified in revenues and cost of revenues in the LCCI’s preliminary 2005 consolidated financial statements.

Nevertheless, LCCI reported that during the two years it was cited for deficiencies, as well as the subsequent period through May 2007, there were no disagreements between the company and its auditor on the matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures.

Amid the accounting and reporting problems, LLCI completed an $39 million, all-cash acquisition of the U.S. engineering services business of Wireless Facilities Inc. The June merger also led a $5.4 million savings program, which was accomplished by consolidating facilities in the U.K. and eliminating 60 jobs, worldwide.

Wireless Facilities, however, is having its own problems . The company’s investigation into option dating uncovered both improper dating which will lead to as much as $40 million restatement, some $6.3 million of which was the result of an options fraud scheme by an employee who has since pleaded guilty to criminal charges. The company has said it will not be able to provide LCCI with a “carve-out” audit until it has completed its own restated annual report for 2006.