Marvell Technology’s mention of senior management’s “tone,” in its disclosure of an internal accounting probe, suggests investors may have a lot more to worry about than a simple revenue-recognition mistake and weak demand.
The stock MRVL, -3.00% had plunged 16% Friday, on volume that was nearly eight-times the full-day average, to close at its lowest level since Jan. 18, 2013.
The Bermuda-based company said in a regulatory filing that the investigation would focus on a percentage of revenue that was improperly recognized during its second quarter. The filing said the percentage was a result of weaker-than-expected demand in hard-disk-drive markets.
‘We consider the stock to be unownable.’
Chris Caso, Susquehanna
But the real issue for investors could be this statement in the regulatory filing:
“The investigation consists of a review of certain revenue recognition issues in the second quarter of fiscal 2016 and any associated issues with whether senior management’s operating style during the period resulted in an open flow of information and communication to set an appropriate tone for an effective control environment.”
This implies that the accounting issues don’t revolve around a rogue sales manager, nor a one-time breakdown in accounting controls. The statement suggests the problem is what is known in accounting circles as the “tone at the top,” meaning the people responsible are at the top of the chain of command.
The company was not immediately available for comment.
As the Securities and Exchange Commission has illuminated: “First and foremost, Sarbanes-Oxley makes clear that a company’s senior officers are responsible for the culture they create, and must be faithful to the same rules they set out for other employees.”
Analyst Chris Caso at Susquehanna Financial wrote in a note to clients, “We consider the stock to be unownable during such an investigation, and it will likely take a considerable amount of time for investors to regain confidence in management.”
Marvell’s internal probe could very easily turn external, as the SEC only needs “official curiosity” to launch its own investigation.
Sitting at the top of the corporate pyramid is co-founder Sehat Sutardja, who is both Marvell’s chairman of the board and chief executive officer.
Among others in senior management, Sukhi Nagesh is currently Marvell’s interim chief financial officer. He took over for Michael Rashkin, who resigned on May 20, after a year and a half as CFO and 16 years with the company. Weili Dais is the company’s co-founder and president, and Wining Zu is its chief technology officer.
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