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Radio Nowhere: Tax Risk Delists Emmis Communications

radiosMisinterpretation of the tax code led to the NASDAQ delisting of Emmis Communications after investors dumped the stock following a restatement announcement.  In an 8-K Filing Emmis announced that its previously filed public financial statements cannot be relied on for accuracy.  Emmis’s stock price has been trading  below $1.00 per share after investors negative reaction to the company’s restatement of earnings and financial condition.  The restatement was necessary after Emmis discovered it improperly accounted for the tax treatment of Federal Communication Commission  (FCC) licensing rights.

Emmis operates a number of radio stations in key metropolitan markets and was forced to restate its financial statements for the past fiscal year and for the first quarter of this year to adjustments it made in its provision for income taxes.   Last year the company wrote down the value of its FCC licenses.  This put Emmis into a loss position leading the company to overstate the benefit for income taxes and understated deferred tax liabilities by $25.3 million for its fiscal year ended February 28, 2009.

Emmis CEO Jeff Smulyan,  released a statement on the company website that read, “Certainly, ‘restating our earnings’ sounds ominous, but our restatement solely relates to a non cash technical tax issue that has no impact on our operations. While there might be big numbers involved and a lot of paperwork being filed, I don’t see anything to worry about.”

This is an interesting example of the consequences of tax risk.  Most tax risk events result in huge settlement amounts, damage to executive reputations and the company brand and sometimes prison terms for the persons and parties involved.  The delisting of the Emmis stock and the severe devaluation of shareholder equity is a more extreme result of the failure to mitigate tax risk factors.

Sum2’s  Corporate Audit Risk Program (CARP) guides corporate tax managers through a thorough risk assessment of exposures to IRS Industry Focus Issues (IFI).  CARP helps tax professionals score threats of IFI risk factors and implement mitigation actions.  The CARP lists Emmis tax problem as a Tier Three IFI risk factor.  It falls  under the communications  technology and media industry guidelines for amortization on intangibles, licensed programs and contract rights.  The CARP is an indispensable guideline and tool that may have provided insights into the tax risk that led to a costly delisting and evaporation of shareholder equity.

Emmis share price closed today at $1.32.  We wish the management, shareholders and employees a speedy remediation to the problems confronting the company and a recovery of the share price to reestablish its listing on the NASDAQ.

You Tube Music Radio: Bruce Springsteen, Radio Nowhere

Risk: tax, shareholder equity, reputation, regulatory

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October 15, 2009 - Posted by | business, CARP, CPA, IARP, IRS, regulatory, reputation, Sum2, Tax | , , , , , , , , , , , , , , , , , , , , ,

3 Comments »

  1. The name is Emmis not Ennis….mistakes happen don’t they?

    Comment by Lisa | October 15, 2009 | Reply

  2. Dear Lisa,

    I owe you an apology.

    The post was rife with a misspelling of EMMIS.

    If I have made any other factual misrepresentations of your situation please bring that to my attention also.

    Again my apologies.

    jbm

    Comment by riskrapper | October 15, 2009 | Reply

  3. Here is the link to a CFO magazine article on the Emmis Communication blog post.

    http://www.cfo.com/article.cfm/14446660/c_14446850?f=home_todayinfinance

    Comment by riskrapper | October 16, 2009 | Reply


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