Refer to the information about ClearOne Communications in Case C2-2 from Chapter 2.

Required:
Obtain the Form 10-K ClearOne filed with the SEC on August 18, 2005. (Go to www.sec.gov and select “Filings” and then “Search for Company Filings.” Search for ClearOne and then select ClearOne, Inc. Enter “10-K” for filing type and click on “Search.” Then click on the appropriate document.) Analyze the income statement effects of the restatement that appears on page F-19 of that filing. Describe the overall effects of the restatement on ClearOne’s income statements for 2001 and 2002.

Case C2-2

ClearOne Communications Inc. is a provider of end-to-end video and audio conferencing services, including the manufacture and sale of video and audio conferencing products. From its inception as a manufacturer of this equipment through 2001, ClearOne sold its products through a nationwide network of manufacturer’s representatives. Sometime in early 2001, ClearOne decided to alter its business model and instead of utilizing manufacturer’s representatives, began selling its products through a nationwide network of distributors complemented by a direct sales force. Through early 2001, ClearOne experienced robust growth and increased product sales every quarter. From the selected financial data extracted from ClearOne’s Form 10-Ks that follow, this growth appeared to continue through fiscal 2002. However, a complaint filed by the SEC against ClearOne alleges that things may not be as rosy as they seem.

Required:

Retrieve the SEC’s complaint against ClearOne Communications Inc. (www.sec.gov/litigation/litreleases/lr17934.htm). Describe management’s scheme for inflating revenue.

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ClearOne Communications Inc. Selected Financial Data, Years Ended June 30, 2002 2001 2000 $ 37,215,161 17,327,525 15,057,167 7,942,952 $22,226,504 5,891,909 8,033,867 2,974,456 Product sales $28,189,612 11,688, 793 10,633,956 5,869,106 Service sales Cost of goods sold-products Cost of goods sold-services Operating expenses Pre-tax operating income Income from continuing operations Net accounts receivable at June 30 14,904, 460 8,470,883 20,809,281 10,568,861 6,541,229 10,733,286 7,410,752 $20,316, 730 5,525,185 4,301,742 $ 7,212,970 $ 4,153,677 36.1% Cost of goods sold %-products 40.5% 37.7%