Apr 10th 2013
By Frank Byrt
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KPMG LLP has resigned as auditor at the nutritional products maker Herbalife Ltd. and the footwear retailer Skechers USA Inc. because a senior partner at the accounting firm who was involved with their accounts was being investigated for insider trading.
Herbalife's and Skechers announcements on April 9 came a day after the Big Four accounting firm disclosed that one of its senior audit partners in its Los Angeles office had been involved in providing nonpublic client information to a third party who then used the information in stock trades involving several West Coast companies.
KPMG described the partner's actions as "rogue" and said that he had been fired, but KPMG did not identify that individual or the third party.
Manhattan Beach, California–based Skechers said KPMG told the company that the KPMG lead partner on the Skechers account is under federal investigation for providing nonpublic information of the partner's clients to a third party in exchange for money that was allegedly used to trade in its stock.
Skechers said that in addition to withdrawing as its auditor, KPMG also said it must "withdraw its auditors' reports for the fiscal years 2011 and 2012.
"None of KPMG's audit reports on Skechers' financial statements for the fiscal years ended December 31, 2011 and 2012 or KPMG's audit reports on the effectiveness of internal control over financial reporting as of December 31, 2011 and 2012 contained an adverse opinion or a disclaimer of opinion," Skechers said.
David Weinberg, Skechers COO and CFO, said in a press release, "KPMG has advised us that that they have no reason to believe that there were any misstatements in our financial statements, and we firmly believe that there has been no misstatements of our results or financial condition."
Skechers also said it is scrambling to find replacement auditors and "have them in place as soon as possible. Skechers is unable to provide an estimate of when the re-audit of fiscal years 2011 and 2012 will be completed."
Los Angeles-based Herbalife said in its press release that KPMG resigned as of April 8 because the firm "had concluded it was not independent because of alleged insider trading in Herbalife's securities by one of KPMG's former partners who, until April 5, 2013, was the KPMG engagement partner on Herbalife's audit."
"KPMG advised the company it resigned as Herbalife's independent accountant solely due to the impairment of KPMG's independence resulting from its now former partner's alleged unlawful activities and not for any reason related to Herbalife's financial statements, its accounting practices, the integrity of Herbalife's management, or for any other reason," the company said.
Herbalife stated that KPMG said "it had no option but to withdraw its audit reports on Herbalife's financial statements for the fiscal years ended December 31, 2010, 2011, and 2012, and the effectiveness of internal control over financial reporting as of December 31, 2010, 2011, and 2012 and that such reports should no longer be relied upon as a result of KPMG's lack of independence created by the circumstances described above.
"Herbalife's Audit Committee and management continue to believe that the company's financial statements covering the referenced periods fairly present, in all material respects, the financial condition and results of operations of the company as of the end of and for the referenced periods and may continue to be relied upon and that the company's internal control over financial reporting was effective during these periods," Herbalife said.
On April 9, Herbalife said in a US Securities and Exchange Commission (SEC) Form-8K Current Report filing that "it has begun a search process to identify KPMG's successor. The company will disclose its engagement of a new independent accounting firm once the process has been completed as required by SEC rules."
Trading in shares of Herbalife was temporarily suspended April 9.