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It Takes Two to Restate

In unrelated cases, WellCare and Toyota's U.S. credit arm unravel years of accounting errors. Toyota's relates to debt and derivatives problems; We...
Stephen TaubJuly 22, 2008

Two very different companies — WellCare Health Plans Inc. and the Toyota Motor Credit Corp. arm of the Japanese automaker — reported that accounting errors were forcing them to restate three years of financials.

WellCare’s case reflects a longer history of accounting problems. The company, which provides managed-care services for Medicaid and Medicare plans, said the revisions for the three years ended December 2006, and the first half of 2007, stemmed from questions raised by federal and state regulators.

The WellCare revisions relate to accounting errors that had resulted in inadequate liabilities being recorded for anticipated premium refunds under some provisions of the “behavioral health component” of contracts. Affected are its Medicaid contract with the Florida Agency for Health Care Administration; its “Healthy Kids” contract with the Florida Healthy Kids Corp., offering health insurance for children whose families are ineligible for Medicaid; and its Medicaid contract with the Illinois Department of Health and Family Services, providing services to Illinois Medicaid members.

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As a result of the restatements, WellCare will reduce diluted earnings per share for the six months ended June 30, 2007, by about 5 percent, reduce 2005 and 2006 earnings by 9 percent and 2004 earnings by 14 percent. The company also said the restatements affect premium revenues, net income before income taxes, net income, and other payables to government partners for the periods.

Last week, WellCare announced that Thomas L. Tran would join the company as senior vice president and CFO, effective Monday. In January, CFO Paul Behrens, Chairman and CEO Todd Farha, and general counsel Thaddeus Bereday each abruptly resigned, three months after federal and state agencies conducted a search of the company’s Tampa headquarters. The three men agreed to remain as nonexecutive employees through March 31. At the time, the company appointed Charles Berg as executive chairman and Heath Schiesser as CEO.

WellCare said then that it was cooperating with the Justice Department, the Florida attorney general, and others, and that it had received requests for information from the Securities and Exchange Commission. The company added that it was responding to subpoenas issued by the Connecticut attorney general in connection with Connecticut’s Medicaid program.

Most recently, Tran was president, chief operating officer, and CFO for health care management services provider CareGuide Inc. From 2005 to 2007 he was senior vice president and CFO for Uniprise Inc., a UnitedHealth Group company, and from 1998 to 2005 he was senior vice president and CFO at ConnectiCare Inc.

“The board of directors and the entire management team are committed to the highest standards of business conduct, compliance and financial reporting and controls,” Berg said in explaining the latest actions at WellCare. “The decision to restate historical financial statements is an appropriate step in positioning the company for the future.” The company said that the restatement included no civil, criminal, or administrative fines or sanctions.

In the Toyota Motor Credit case, the company said it would restate financial statements for the three March 31 fiscal years, along with certain quarters, to correct accounting errors, most of which related to treatment of debt in hedging relationships. Altogether, the restatements will increase its net loss for the latest fiscal year by $89 million, while decreasing its 2007 net income by $2 million its 2006 net income by $36 million.

Last week, the Toyota unit said that it identified a deficiency in its inherent internal control risks from the manual nature of compiling information from its existing debt and derivative accounting system used to determine the mark to market value of its debt portfolio. It said it had identified that error as part of remediation efforts during the process of data conversion and reconciliation in its implementation of a new debt and derivative accounting system. The error related to certain debt denominated in foreign currencies, it said, adding that market values of the debt were incorrectly recorded, resulting in an understatement of debt and interest expense.

The Toyota error was not due to a misapplication of SFAS 133, Accounting for Debt Instruments and Hedging Activities,, it said, but rather reflected a clerical error relating to certain manual processes.

The company said that because the error relates to non-cash items, correction of the error does not affect its net cash provided by operating activities or the company’s ability to repay its outstanding debt obligations as they become due. Correcting the error results in an increase in interest expense, an increase in debt, and a reduction in deferred income taxes and retained earnings in prior quarterly and annual fiscal periods.

Toyota Motor Credit’s restatement will also include the impact of certain other errors relating to the accounting for debt and derivative transactions, it said. These errors, previously determined to be not material to any previously issued financial statements, had been identified and corrected on a cumulative basis during fiscal 2008 and 2007. As part of the restatement, the company said it would reverse these cumulative adjustments and instead record the correction of the errors in the periods to which the errors relate.