Errors Put Internal Controls in Limelight

The network-services provider will correct underbilling for services and miscalculation of stock-based executive comp.
Stephen TaubOctober 12, 2007

Limelight Networks will restate previous financials to correct a services underbilling and an executive-compensation miscalculation. While the revisions will spawn higher revenue and lower losses for 2006 and the first two quarters of 2007, the company says, the errors revealed two material weaknesses in its internal controls.

After receiving a customer inquiry, Limelight reported on Thursday, it conducted an internal review of monthly customer billings. As a result, it discovered that one customer had been underbilled by $900,000 for 2006, $500,000 for the first quarter of 2007, and $200,000 for June. When the company reports its third-quarter 2007 revenue, it will include about $100,000 associated with those billing corrections.

Company officials discovered the second error as they were installing a stock-option administration system, Limelight stated. The error was a miscalculation of the company’s stock-based compensation expense under the Financial Accounting Standards Board Statement No. 123R, Share-Based Payment.

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The misstep mainly concerned the service period during which compensation expense will be recognized. Correcting this error will shift the period during which originally computed expense will be recognized.

As a result of the underbilling errors, Limelight concedes that its customer-billing controls were lagging. The company says that it will now reconcile monthly customer bookings to monthly revenue results and that senior management will produce a detailed review of monthly revenue by customer. Limelight has also installed periodic internal reviews of customer-billing system inputs.

Limelight also says its controls over stock-based compensation expense calculation fell short involving length-of-service and vesting-period calculation, and concedes that until recently, it used a manual process to gauge stock-based compensation costs. In the third quarter of 2007, however, it reportedly hired an outside firm to administer its employee stock-option plan.