By Alison Rice. In a news cycle where the headlines continually announce the latest scandals in the formerly vanilla world of accounting, the last thing a company wants to reveal is a problem with its books.
Yet Beazer Homes did just that in July, after an internal audit revealed that a handful of employees in the Fort Myers, Fla., division had been misallocating funds for the past three years. "We had reasons to be questioning their results," says David Weiss, Beazer's CFO. "We had no idea there was anything like that."
What happened? Employees in accounting and other areas apparently shifted costs improperly between communities, which resulted in improved operating performance for selected communities and the division overall. Or so it looked. The Atlanta-based builder took an earnings charge of $2.6 million (or 12 cents per diluted share) in the third quarter because of these accounting issues.
No one from the corporate office was involved, according to the company, and the Florida employees in question are no longer with Beazer.
Analysts initially braced themselves for the effect of the announcement, which came after the market's close on July 16. "I thought there would be a temporary impact because the market has a heightened sensitivity to anything that sounds like bad news right now," says Joseph Sroka, an analyst with Merrill Lynch in New York.
But the news had relatively little effect. On July 17, Beazer (NYSE: BZH) opened at $61.72 and closed the day just 32 cents lower--hitting a high of $66.17 and a low of $59.60 in heavy trading.
The charge is relatively small. "While you hate to say anything's insignificant," Sroka says, the charge essentially is, given Beazer's overall size and performance. The builder did more than $1.7 billion in revenue in the past three quarters. The company does not plan to restate its past earnings. And, while other companies are cutting their earnings guidance, Beazer--despite the charge--beat analysts' third-quarter projections by 19 cents per share.
Still, Beazer does plan to make some changes. According to Weiss, the builder expects to boost its internal audit and corporate controller staff and require more detailed journal entries as a result of the discovery. "It's very worrying," Weiss acknowledges. "You hate to find this, but we're glad to have it behind us."
"Looking at this in a more rational frame, this is positive news about a company being proactive internally," Sroka says. "In another time, away from WorldCom and Enron, we'd be applauding them for it."