Update – Catapult and Deloitte – Look Past The End Of Pinocchio’s Nose


There have been a few emails and comments going back and forth between my friend Dennis Howlett and I. Let me elaborate so as to hopefully clarify my contentions.

Catapult filed their 2006 10-K late. They were obviously debating the treatment of this issue with their auditor, Deloitte. Although the issue may seem small to some, it was significant enough such that a right decision was critical to an accurate filing and the disagreement was enough to cause Deloitte to classify it as the worst kind of SOX error. Once Catapult capitulated to Deloitte’s advice and filed, Deloitte must have felt that the dispute was cause to believe the CFO lacked willingness or ability to review key transactions for proper GAAP.

Although the wording in some parts of the annual report may refer to management’s assessment, it’s a SOx nuance in that Sarbanes Oxley and internal controls are, in reality, management’s responsibility. The external auditors give an opinion on whether they agree with management’s assessment. The bottom line is that the company had a SOx material weakness and it’s because the CFO wasn’t able or willing to be the control of last resort for making sure the company follows GAAP.

Catapult Communications Corporation (the “Company”) requires additional time to prepare and file its Annual Report on Form 10-K for the fiscal year ended September 30, 2006 (“Form 10-K”) within the prescribed period (on or before December 14, 2006) because the Company has not completed its determination as to the appropriate classification of its investments between cash and cash equivalents and short-term investments.

When they did file the 10-K, Deloitte’s opinion of controls over financial reporting (the auditor can agree or disagree with management’s assessment for SOX) was Adverse.

As of September 30, 2006 the Company’s controls over the accounting for cash and cash equivalents and short-term investments did not operate effectively to appropriately identify certain variable rate demand notes and determine that such variable rate demand notes were presented in accordance with generally accepted accounting principles within the Company’s balance sheet and statement of cash flows. This material weakness resulted in an audit adjustment of approximately $3.6 million to the 2006 consolidated financial statements between cash and cash equivalents and short term investments.

This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended September 30, 2006, of the Company and this report does not affect our report on such financial statements.

In our opinion, management’s assessment that the Company did not maintain effective internal control over financial reporting as of September 30, 2006, is fairly stated, in all material respects, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of September 30, 2006, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

My friend Dennis Howlett was kind enough to link to me not once, but twice in his post regarding Catapult’s change in auditors from Deloitte to a small firm ranked 67th.

Yes, it is unusual for a firm to be “open” when disclosing to the SEC why it changed auditors. I’ve talked about that before. It is rare to see any disagreements mentioned in the filings as that makes both parties look bad, but it does happen occasionally. I suppose when you’re such a small company like Catapult and you’re losing money, you’ve got to cut somewhere…

But for a public company like Catapult to have gone into so much detail on their disclosure in order to embarrass Deloitte and portray them as money-grubbing, no-value, face men who can be easily replaced by a no-name firm was, to me, more than a little suspect.

It wasn’t too difficult to get to the bottom of this one. Which is why it’s so disappointing CFO.com did not. Why write the story about a pissed off, embarrassed, humiliated CFO when you can write the same old story about how much the Big 4 charge?

Because it’s called CFO.com!


From Catapult’s Annual Report for the Fiscal Year End September 30, 2007:

“As a result of its assessment of internal control over financial reporting, management concluded at the end of fiscal year 2007 that the material weakness reported in the Annual Report on Form 10-K for the fiscal year ended September 30, 2006 had been remediated as of September 30, 2007, and our internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.

Our independent registered public accounting firm, Deloitte & Touche LLP, has issued an audit report on our assessment of the Company’s internal control of financial reporting.

During the year the Company implemented a control to address the material weakness identified at September 30, 2006 as follows:

The Company’s Chief Financial Officer performs a detailed quarterly review to confirm that the Company’s accounting for its cash, cash equivalents and short-term investments is in accordance with the requirements of generally accepted accounting principles in the United States.

(Blogger’s Note: This means the CFO was not performing this duty, a breach serious enough to cause a material weakness , the worst kind!)

During the fourth quarter of fiscal 2007, the Company evaluated and tested this control and determined the material weakness was remediated.

By the way, Catapult dismissed PwC in January 2006 and selected Deloitte. Looks to me that they are not so much penny wise and pound foolish but a bunch of spoiled, insolent children intent on having their way.

Hey SEC – Isn’t auditor/opinion shopping against some rule of yours?

Better keep an eye on these guys.

3 replies
  1. Dennis Howlett
    Dennis Howlett says:

    Francine – I trawled back to the 2006 accounts to find out what happened. As far as I can tell, there was a mis-treatment of a transaction(s?)

    “Specifically, controls were not operating effectively to ensure that (i) short-term investments were properly excluded from cash and cash equivalents on the balance sheet, and (ii) the corresponding purchases and sales of short-term investments were properly presented in the investing section of the statement of cash flows. The misclassification of these securities of approximately $3.6 million at September 30, 2006, had no impact on our current assets, working capital, stockholders’ equity, net income (loss), net income (loss) per share or net cash provided by operating activities for the affected periods.”

    Looking at the balance sheet, it’s certainly a sizable error based on $22mill in cash reported. BUT – they walked with a clean bill of health fro D&T so presumably the control problem was found internally. That seems confirmed by “our management determined…” rather than ” during the course of audit…”

    I fail to see how this puts them ‘on watch.’

    If ‘shopping for opinion’ is a known practice then surely that’s a matter for regulation because it requires collusion.

  2. Francine McKenna
    Francine McKenna says:

    @Dennis At year end 2007 they said they fixed a Sarbanes Oxley material weakness from 2006. Their CFO was not reviewing all major transactions for compliance to GAAP.that’s a key control. My point was that the CFO not doing his job was a problem that Deloitte called out. It’s not unusual for these smaller high tech companies to not have the right expertise for the type of transactions they get into. They hire someone’s buddy to be CFO instead of someone boring but with the right CV. Hell, GE didn’t know how to book derivative transactions and they’ve got all the money in the world to buy the right expertise. Now it looks like Catapult is too cheap to pay for the best expertise. That doesn’t meant they aren’t doing complicated things anymore, just means it will take longer for them to cause problems and then it will be said to be a “sudden” downturn or some excuse like that.

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