Accounting revelations hit Skillsoft share price

Shares in SkillSoft lost a third of their value yesterday when it revealed that SmartForce, the Irish firm which it acquired last month, had improperly accounted for revenues over a three year period.

The US e-learning firm said SmartForce, one of the Republic's most successful technology firms, may have booked up to €40 million revenue earlier than it should have during the technology boom.

The disclosure by SkillSoft is the latest in a string of damaging accounting revelations involving prominent Irish firms such as Elan Corporation and Baltimore Technologies. Shares in SkillSoft slumped on publication of the news. They closed down 33.69 per cent at $3.07 on the Nasdaq.

SkillSoft said it had identified several accounting issues that would require SmartForce's pre-merger financial statements to be restated. These should not have any adverse effect on the firm's operating results for quarter ended October 31st 2002, or its business outlook for future fiscal periods. However, SkillSoft said it was possible other items might be discovered in the process of restating SmartForce's financial accounts.

SkillSoft detailed four accounting issues that would cause the restatement of results.

The first involved the recognition of $3.5 million revenues in the fourth quarter of 2001 under a reseller arrangement. All the revenue was booked when the deal was signed rather than when cash was received from the client. This revenue will now be restated to recognise revenue only as payments were received from clients.

A further $8 million revenue was booked by SmartForce correctly on execution of a deal but this amount of revenue recognised immediately should have been discounted to reflect the time value of money in connection with the payment stream, the firm said.

The largest amount of revenue, amounting to some $28 million in 1999, 2000 and 2001, affected by the restatement was booked on execution of the contracts rather than over the duration of a deal.

SkillSoft said it was still evaluating with its auditors whether this was appropriate, and delayed the publication of its third-quarter earnings to investigate the issues.

The firm also said SmartForce may be required to increase its bad debt reserve as of December 31, 200, in the range of $1 million.

Analysts said the disclosure by SkillSoft was not unexpected because the firm had more conservative accounting policies than SmartForce. But Mr Trace Urdan, a US analyst with Think Equity, said uncertainty was currently hitting the stock and that he would like to see more detail on the contract renewal rate going forward.

SkillSoft announced yesterday it would close three non-core divisions to reduce costs in a move that would cut its revenues by $30 million in fiscal 2004. It also said it had experienced lower than anticipated renewal rates for contracts during the integration period with SmartForce.

SkillSoft is due to host an analysts' briefing on Thursday to discuss the accounting issues and give further guidance on revenues.

Mr Greg Priest, chairman of Skillsoft and former chief executive of Smartforce, will attend along with Chuck Moran, president and chief executive of Skillsoft.