Will SEC Come Down Hard on E&Y over PeopleSoft?

Commission charges that firm violated auditor independence rules in hawking software with PeopleSoft. Elsewhere: Fleming hears from the SEC, while Interpublic will restate the restatement of its restatement. Got that?


The Securities and Exchange Commission has once again accused Ernst & Young of violating auditor independence rules.

The proceedings are similar to those the commission instituted against E&Y back in May. Those charges were eventually dismissed in late October.

In this go-round, the SEC’s division of enforcement and office of the chief accountant allege E&Y violated the auditor independence rules in connection with E&Y’s audits of the financial statements of PeopleSoft Inc. from 1994 through 2000.

The SEC alleges E&Y caused PeopleSoft to file reports and other documents that failed to include independently audited financial statements.

The SEC also alleges that, while E&Y was serving as PeopleSoft’s auditor, E&Y and PeopleSoft jointly developed and marketed a software product for PeopleSoft that incorporated certain components of PeopleSoft’s proprietary source code into software previously developed and marketed by E&Y’s tax department.

As a result, E&Y closely coordinated and jointly marketed its implementation services with PeopleSoft, including reciprocal endorsements of each other, links to each other’s Web sites, holding themselves out as “business partners” of each another, and sharing customer information, customer leads, and “target accounts,” according to the SEC.

The commission is requesting E&Y to cease and desist from committing or causing such violations and any future violations and to disgorge the audit-related fees it was paid for the audits in question.

This is the second auditor independence case the commission has initiated against E&Y.

In 1991, the SEC filed a complaint in federal court charging that E&Y, by failing to maintain its independence, caused and aided and abetted violations by two other audit clients. That case was settled in 1995.

Overall, it’s been a bad fortnight for E&Y. As CFO.com reported earlier this month, the Federal Deposit Insurance Corp. (FDIC) filed a $2 billion suit against E&Y for the firm’s role in the Superior Bank insolvency—the fourth-largest bank failure since 1992.

Reportedly, the FDIC suit claims E&Y committed fraud, accounting malpractice, and gross negligence in its reports of Superior’s finances.

SEC Probing Fleming’s Financials

Meanwhile, the SEC is reportedly investigating a few other companies.

Fleming Cos. noted on Wednesday the SEC has informed the supermarket distributor that it has begun an informal inquiry into a number of matters.

The company said the probe is related to media reports of Fleming’s vendor trade practices and its previously reported second-quarter 2001 earnings and 2002 earnings. The commission is also looking into the grocery distributor’s accounting for drop-ship sales transactions with an unaffiliated vendor in Fleming’s discontinued retail operations, as well as the company’s calculation of comparable store sales in its discontinued retail operations.

“We will cooperate fully with the informal inquiry and will provide the staff with all the information it needs in responding to its fact-finding,” said Mark Hansen, chairman and CEO of Fleming, in a statement.

In a bit of damage control, Hansen added: “I hope, however, that this event does not detract from the very significant announcement we made earlier today regarding the first agreement to sell a number of our retail stores and the supply agreement we entered into with Save Mart.”

Earlier in the day, Fleming management announced that the company planned to sell 28 of its California-based groceries to Save Mart Supermarkets for $165 million.

Fleming could probably use the cash right now. The company is sitting on $2 billion in debt. What’s more, according to CFO PeerMetrix, Fleming is currently carrying only one day’s operating expenses held in cash. (Click here to see Fleming’s optimal cash ranking, according to CFO PeerMetrix).

The share price of Fleming, the largest grocery-supplies distributor in the United States, closed at $6 on Wednesday. That’s well off its 52-week high of $27.25. The stock price of Fleming common has taken a beating ever since the company’s largest customer, Kmart, declared bankruptcy.

SEC Mining Phelps Dodge’s Accounting

Phelps Dodge Corp. acknowledged Wednesday the commission is examining the company’s calculation of its proven and probable reserves of copper and molybdenum at its operating, curtailed, and development properties.

The company indicated the SEC may require it to use lower metals-price assumptions in its reserve determinations. But management at Phelps Dodge, a mining and manufacturing company, believes its assumptions are generally consistent with average historical figures.

“The company is currently discussing these issues with the SEC staff and evaluating the potential effects of using the lower price assumptions in its reserve determinations,” Phelps Dodge noted in its quarterly filing.

It added that a reclassification of reserves at an operating property would increase depreciation and amortization charges, possibly for prior periods. However, it does not expect any such increases to be material.

Phelps Dodge also said it might record additional impairment charges, including ones from prior periods, that could materially affect the company’s earnings and shareholder’s equity.

Interpublic Upsizes Its Restatement

Interpublic is pulling a WorldCom…sort of.

The advertising giant said it would restate a restatement of a previous restatement. Seems few companies can get by with just one restatement these days.

As for Interpublic, the company reported it identified another $61.3 million in expenses not previously accounted for in the past five years. This brings the total amount of Interpublic’s restatement to $181.3 million.

Just last month, Interpublic estimated the restatement would come in at around $120 million. That figure was twice what the company had projected back in August.

The restatements are related to an investigation into the billing practices at McCann-Erickson.

The company’s management said the restatement would reduce previously reported earnings related to periods in 2001 and before. Interpublic added that the restatement did not have an effect on client funds, however.

Not surprisingly, the company also indicated it has begun searching for a new CFO of McCann-Erickson WorldGroup and a new chief operating officer of the corporation.

Bristol-Myers Says Restatement Is Coming

Bristol-Myers Squibb Co. chief financial officer Andrew Bonfield said the company will soon release details of how it will restate its earnings and revenue going back to 2000, according to the Associated Press.

Bonfield, who took over as CFO on September 23, made the announcement during a speech at the Credit Suisse First Boston Healthcare Conference in Phoenix.

In late October, the drug company reported that it would restate more than $2 billion in sales due to its accounting for its wholesaler inventory in its U.S. pharmaceuticals unit.

Management at the pharmaceuticals company said it will restate sales and earnings upward for 2002 and downward for prior periods that were affected, primarily in 2000 and 2001.

The drug company also indicated it will reallocate diluted earnings per share by about 61 cents over the three-year period. It said the moves are being taken on the advice of the company’s accountant, PricewaterhouseCoopers LLP.

Management at Bristol-Myers stressed at that time the figures were preliminary estimates and are subject to change.

Toe Jam: Footstar’s AP Off

Footstar Inc. said it has launched an internal investigation of certain accounting practices and retained outside legal and forensic accounting experts. The reason? The company’s management says it discovered it understated Footstar’s accounts-payable balance by up to $35 million as of September 28.

The company added it will restate its balance sheet and income statement for the first nine months of 2002 and prior periods, and that a significant portion of the discrepancies affect fiscal year 2001 and prior periods.

Footstar’s management said that in the course of a management review of the account-reconciliation processes at its shared-services center in Dallas, it discovered discrepancies in the reporting of its accounts-payable balances. It added the discrepancies appear to mainly involve its athletic segment.

Since the investigation is in a preliminary stage, the aggregate amounts of the understatements, the periods affected, and the causes of the understatements have not been finally determined.

The company added it did not file its quarterly report because the investigation is continuing.

“Our board and management team are committed to delivering financial information that is accurate and reliable,” said Mickey Robinson, chairman and CEO, in a statement. “It is inexcusable and unacceptable that this situation has occurred. We have taken prompt and strong action, and we are working as quickly as we can to get to the root of the problem, accurately assess the impact on our reported results and take corrective action so that something like this does not happen again.”

Ex-con CFO Arrested Again

The head of 800 America.com might be dialing 1-800-lawyers.

David Elie Rabi, CEO, CFO, and a director of online retailer 800 America.com Inc., was arrested Wednesday shortly after the SEC alleged that he and Tillie Ruth Steeples, an undisclosed control person of 800America, engaged in a massive fraud.

Specifically, the SEC charged the two falsified financial results for 800America since at least 2000, unlawfully sold unregistered stock through nominee accounts, failed to disclose the criminal histories of Rabi and Steeples, and made other misrepresentations.

The SEC said Rabi was convicted in 1997 of securities fraud in Kentucky and Steeples was convicted in 1996 of smuggling drugs into a prison.

The commission is seeking preliminary injunctions, asset freezes, and other emergency relief.

“This case is about hardened criminals who controlled a small public company and used it as a vehicle for a truly outrageous, blatant fraud,” said Wayne Carlin, regional director of the commission’s northeast regional office. “Defendants fabricated operating results, manufactured corporate books and records, dumped unregistered stock on the public, and stole corporate assets.”

These days, that sounds about par for the course.

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