An insider-trading scandal has left Big 4 accounting firm KPMG reeling, but it
has also created a crisis for the audit clients pulled into the fray, which now
find themselves with a mess to clean up.
Faced with the sudden loss of their audit firm, which was forced to resign the engagements, and the nullification of a total of five years worth of audit opinions, officials at Skechers and Herbalife are now scrambling to find new auditors and catch up on regulatory filings.
Both companies filed the required Form 8-K to indicate that KPMG had resigned and withdrawn audited financial statements because of allegations of insider trading involving the engagement partner in charge of their audits. Meanwhile, the Department of Justice and the Securities and Exchange Commission are pursuing insider-trading charges against Scott London, the former partner in charge of KPMG's Los Angeles audit business, whom KPMG fired when it learned of the unfolding investigation.
The Justice Department and SEC say he provided confidential information regarding five KPMG clients to a friend and golf partner, Bryan Shaw, who used the information to trade in those companies' securities. Shaw reportedly paid London for the information in cash, jewelry, and entertainment valued at about $55,000.
While Skechers and Herbalife have not been accused of any wrongdoing, they must still work to lessen the consequences from the scandal. Herbalife published a brief statement to say it was working proactively with New York Stock Exchange officials on a detailed plan to replace KPMG as its auditor, and it does not anticipate any proceeding by the exchange to delist the company. Herbalife said it also has confirmed that KPMG's resignation and withdrawal of audit opinions will not result in any credit defaults.
The Justice Department and SEC charges named three additional KPMG clients whose confidential information London allegedly traded-Deckers Outdoor Corp., RSC Holdings, and Pacific Capital. The SEC says London was an account executive for Deckers but his role with the other companies is not described. KPMG has not indicated whether it might also resign additional audits, and it did not respond to questions regarding London's role on those accounts.
It's possible KPMG is still discerning whether it will resign or withdraw any other audits depending on London's role with those other companies, says Brian Fox, a former Big 4 auditor and founder at audit services firm Confirmation.com. "It depends on whether he was actively part of the engagement team or he just had access to the information because he was heading up audit in that region," he says. "If he had a hand in the audit itself, I'd expect them to withdraw those audits as well. If he used inforamtion but didn't have a hand in the audit, they may not pull those audits."
Neither company has discussed their efforts any further to get back into compliance with the requirement to have audited financial statements on file with the SEC, but the process includes submitting to new audits for those withdrawn by KPMG. That includes fiscal years 2011 and 2012 for both companies, plus 2010 for Herbalife. The SEC is expected to give companies some grace to get caught up on their audits under the circumstances, says Lynn Turner, a former chief accountant at the SEC. "They'll allow their stock to continue to trade,"
Most Popular Stories
- NSA Defends Global Cellphone Tracking Legality
- Ad Counts Rise in 2013 for Hispanic Magazines
- Top Websites for U.S. Hispanics
- Networks Vie for U.S. Hispanic TV Viewers
- Saab Gets Back into the Game; U.S. Auto Sales Soar
- Apple Activates Customer-Tracking iBeacon
- Dell Offers Undisclosed Number of Employee Buyouts
- 2013 Tech Gift Guide: iPad Mini Still Hot; Chromecast a Great Low-Cost Option
- Authorities Close to Deal with JPMorgan Chase over Madoff Response
- A Biography of Jonathan Ive, Apple's Creative Chief