CyberGuard Corp, the Fort Lauderdale, Florida-based network security software vendor has become embroiled in an all too familiar accounting scandal as the company announced on Monday that it will be forced to restate its revenues. CyberGuard issued a statement informing investors that up to $2.5m of previously booked revenues may disappear, principally from the third quarter ended March 31, but adjustments could possibly stretch back into the first and second quarters of the year. All three of these quarters reported supposed revenues of around $5m each while net losses ran to $1.6m in the third quarter. The problems arise from CyberGuard’s recognition of revenues from stock shipped to software resellers and distributors, the company said. This gray area of accounting is almost always at the heart of such restatement exercises because software companies will always be tempted to book revenues for inventory shipped to third parties, such as resellers. But such sales are always ambiguous because the inventory is sitting with an intermediary and not necessarily with the end user. In this particular instance, the problems look to be with CyberGuard’s international sales which, coincidentally, were $2.5m last quarter. Brad Lesher, vice president of international sales, has spontaneously announced his retirement. The chief executive and chief financial officers of CyberGuard, Robert Carberry and Bill Murray, have now been temporarily suspended from management pending an internal review, the company said. In their absence, CyberGuard is being run by an emergency committee consisting of the remaining directors and headed by Mr Shelly James, who is acting chairman of the company. The stock price has been destroyed by the revelations, falling 70% to close Monday at just $1.88. In April, the stock was trading at over $18. But the problems don’t stop there. Acting chairman James has implied that these irregularities may now jeopardize CyberGuard’s bid for new finance. The company held just $4.4m in cash at the end of March and it’s desperately in need of more. Last quarter’s cash flow statement shows an $8m deficit from operating activities, while accounts receivable climbed to $7.4m, the equivalent of four and a half months worth of CyberGuard’s now questionable revenues. Added to which, auditors KPMG Peat Marwick LLP, who must accept some of the blame for the mess, decided to resign on Friday prior to the problems being made public. Without a revised set of financial statements signed off by the auditors to show the company’s actual position, CyberGuard will find it next to impossible to attract any new money. James said he was surprised by the resignation.
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