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Lingering Concerns over Qualcomm’s Accounting: Greenberg

A year ago Qualcomm disclosed that the Securities and Exchange Commission was investigating its accounting after receiving a whistleblower complaint.

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Since then, the story has all but disappeared.

But the SEC hasn’t—and that has John Gavin of Disclosure Insight wondering, “Why Not?” And wondering whether the lingering probe suggests something potentially more prickly.

Here’s his firm’s note:

Despite reporting favorable results last week, QCOM has a lingering accounting exposure dating back to at least Dec-09 that keeps us concerned. The nature of the accounting exposure is anybody’s guess as disclosures on the issue are vague and have provided no new information since being initially reported in Nov-10.

The typical reaction of investors, which is to assume a disclosed risk related to an accounting matter and associated formal SEC investigation is already in the stock, may be misguided in this case.

That QCOM disclosed this exposure in the first place, especially after sitting on related matters for nearly a year, tells you management deems the matter material. That it continues to be disclosed after yet another year suggests the company is having a difficult time resolving it.

Using our expertise in parsing disclosures, and in this case assessing SEC investigations, we show that the risk associated with this matter could be greater than perceived.

These are our concerns:

-It is likely that the SEC has been investigating QCOM longer than the company’s disclosures indicate.

-QCOM waited 2 months before disclosing the formal SEC investigation in the 10-K, giving it no prominence as would have been the case with an 8-K.

-The formal investigation could indicate that QCOM is not cooperating with the SEC’s investigation.

-QCOM sat on the whistleblower allegations for almost a year.

-Whistleblowers are typically inside or otherwise close to the company. As such, they risk their position with the company, future employment opportunities, persecution, and retaliation.

-There has been no meaningful update since the initial disclosure in Nov-10, so we do not know where the SEC investigation stands today.

-QCOM has not elaborated on the nature of the whistleblower allegations or the issues in the SEC investigation.

-QCOM’s initial disclosure of an internal review was in Nov-10, at which point it had already been completed.

-QCOM did not report the results of the internal review. This is despite the fact the audit committee deemed it necessary to engage forensic accountants and independent legal counsel.

-The poor quality of QCOM’s disclosure related to the SEC investigation leaves us questioning the company’s overall disclosure practices.

Qualcomm has not yet responded to my request for comment, but in its latest 10-K the company pretty much reiterated what it said a year ago:

“The audit committee completed an internal review with the assistance of independent counsel and independent forensic accountants. This internal review into the allegations and related accounting practices did not identify any errors in our financial statements. We continue to cooperate with the SEC’s ongoing investigation.”

UPDATE: Qualcomm later responded to my request for a comment. This is from Bill Davidson, senior vice president of global marketing and investor relations.

"There is no set time applied to an investigation by the SEC.  Therefore, to read anything into the amount of time the investigation has taken that Mr. Greenberg referenced in his story about Qualcomm is unfounded.  We have, and we will continue to cooperate fully with the SEC regarding this matter."

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