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Skeletons still in the closet…

images.jpgNo stranger to this blog, funeral services giant Stewart Enterprises (STEI) has been on our radar since January 2004, when we first noted the strange effective tax rate that Stewart was reporting.  Since then, Stewart has been buried under a wave of accounting errors and misstatements, taking four tries before it finally filed its 2004 10-K.  Unfortunately, Stewart still hasn’t cleared all the skeletons out of its closet.  According to its 2006 10-K, which Stewart filed yesterday, it seems that ghosts from the past are still haunting the company.

First, there were the tax issues, which covered three pages in the K.  Although the Company claims to have resolved many of its issues in 2006, Puerto Rican tax authorities are currently examining certain refund claims, and a field agent has "recently questioned approximately $62,662,000 in deductions taken by the Company’s Puerto Rican subsidiaries in prior years which, if not defended successfully, could result in additional tax, interest and penalties of approximately $28,420,000." That’s more than three-quarters of the Company’s 2006 net income!

Second, Stewart also admitted (in Item 1B of the 10-K) that it was still in discussion with the SEC about its statement of cash flows.   Stewart currently presents as operating cash flow all activities related to preneed funeral and cemetery merchandise and services trusts – but the SEC disagrees.  A quick search of comment letters shows that the SEC first raised this issue in a letter dated March 2006, and although Stewart has disclosed the issue in filings since, it still hasn’t changed its cash flow presentation.

Stewart is also having trouble putting to bed another accounting issue, this time related to revenue recognition.  Although the Company included a detailed explanatory note detailing its efforts with respect to deferred revenue in amendment #3 to its 2004 10-K, the Company nevertheless received a subpoena from the SEC back in November.  According to footnote 19 of the current 10-K, the subpoena was "issued pursuant to a formal order of investigation, seeking documents and information related to the Company’s previously disclosed and completed deferred revenue project. The SEC has informed the Company that this is a fact-finding inquiry to determine whether there have been any violations of the federal securities laws."

So how has the stock fared since these accounting issues began haunting STEI?  According to this 5-year chart, shareholders buying into Stewart in 2004 still find their investment buried underwater.