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... targets. While the dollar value of most of the individual provisions was relatively small, the aggregate value of the provisions made the
difference between a profit and a reported loss, on a pro forma basis, in the fourth quarter of 2002 and the difference between a loss and a
reported profit, on a pro forma basis, in the first and second quarters of 2003.”
As noted in the Independent Review Summary, “[a]s the [Independent Review] progressed, the Audit Committee directed new corporate
management to examine in-depth the concerns identified by WCPHD regarding provisioning activity and to review provision releases in each
of the four quarters of 2003, down to a low threshold. That examination, and other errors identified by management, led to [the Second
Restatement]....”
In addition to this examination of provisioning activity, management, including our new CFO, undertook various initiatives aimed at ensuring
the reliability and integrity of the audited consolidated financial statements included in this report. As part of these efforts, our new CFO
encouraged employees across our finance organization to raise any questions or concerns regarding other potential accounting errors that
should be reviewed for possible adjustment in the Second Restatement. In addition, as management identified individual customer contracts
and transactions for re-examination of the establishment and release of provisions, management also undertook a review of many of those
contracts and transactions more generally to understand the broader nature of the original accounting for the contract or transaction. This
individual contract and transaction review also identified additional accounting issues. As a result of these initiatives, management, with the
assistance of outside consultants, then undertook further detailed reviews of our significant accounting policies, specific transactions and
communications and other documents relating to the identified issues. As a result, the Second Restatement included adjustments to correct
errors relating to a number of accounting issues other than provisioning.
In particular, management identified various errors involving recognition of revenues. To identify, assess and remedy these errors,
management, assisted by outside consultants, reviewed a substantial number of individual transactions as well as significant accounting
policies across all of our major product lines and geographical regions. As part of our review of individual contracts, we analyzed the relevant
contractual provisions (such as delivery and acceptance terms), delivery and other data from our logistics systems, characteristics of the
particular products and customers and the manner in which revenue recognition policies were applied. We also utilized databases within our
accounting systems to identify additional contracts that might raise revenue recognition issues. In light of the increasing magnitude of the total
revenue adjustments identified by the beginning of November 2004, the Board of Directors directed management to conduct additional focused
revenue reviews in selected periods in order to test the conclusions we had reached and identify any potential additional revenue adjustments.
Management has completed these reviews.
Overall in the Second Restatement, as a result of adjustments to correct errors related to revenue recognition, we increased revenues by an
aggregate of $1,492 million in 2001 and $439 million in 2002. We also increased previously announced 2003 revenues by an aggregate of
$386 million. Most of these adjustments constituted the recognition of revenues that had previously been improperly recognized in prior years
and should have been deferred (often over a number of years). This also had the effect of reducing previously reported revenues in 1998, 1999
and 2000 by approximately $158 million, $355 million and $2,866 million, respectively. Of these adjustments identified in the Second
Restatement, approximately $750 million of revenues has been deferred to years after 2003, while approximately $250 million of revenues was
permanently reversed, as described below.
128
Second Restatement Process