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A man spies with binoculars.


Wanted: someone, anyone, who can spot bogus revenues. Clearly, there is a shortage of such people after Poseidon Concepts Corp. reported through a special committee on Thursday that, oops, the company's revenues in the first, second and third quarters of 2012 were misstated – by a lot.

Poseidon, which makes storage tanks used for natural gas fracking, saw its share price crater on the news. It was down 72 per cent in early afternoon trading, to 25 cents in Toronto.

The longer-term decline is even more dramatic. The shares have fallen about 98 per cent since November, from about $15, when it disclosed that it would take a $10-million writedown on its accounts receivable – followed by news that it would eliminate its dividend, lower cash-flow forecasts amid a harsh competitive environment, shuffle some top executive positions and strike that special committee to look into how revenue was booked.

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Now the committee is saying that $95-million to $106-million in revenue for the first nine months of 2012 should not have been recorded as revenue in Poseidon's financial statements – representing as much as 72 per cent of the $148-million that were actually recorded as revenues during the period.

As well, $94-million to $102-million of accounts receivable – as much as 80 per cent of what had been reported previously – shouldn't have been recorded as such.

The revisions are another embarrassment for analysts following the company. Just three months ago, this was a billion-dollar company (in terms of market capitalization) with a stable share price and a bullish following.

Analysts have taken plenty of flak in recent years, but criticism largely has centred around their overly enthusiastic price targets – think quadruple-digit price target for Apple – rather than their ability to spot flaws in a company's underlying operations.

Poseidon shows that even the financial assumptions used by analysts can be faulty – and analysts are unlikely to pick up on any shenanigans. And if the wizards tracking a company full-time can't spot such flaws, then what chance do regular investors have?

To be sure, companies like Poseidon represent an extreme case of investors not getting what they had been expecting. Nevertheless, it suggests yet again the wisdom of buying baskets of stocks rather than betting on individual names: If analysts can't protect investors, diversification is the only defence.

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