Mall and entertainment center developer The Mills Corp. and its operating subsidiary, The Mills Limited Partnership, disclosed that they will restate financials for 2001 through 2004 and the first three quarters of 2005 to correct certain accounting errors. The impact on shareholders equity could be as much as $352 million.
In a regulatory filing, Mills stated that its audit committee, advised by independent counsel and a forensic accounting firm, had identified a number of instances in which company personnel “failed to recognize the implications under GAAP of particular transactions, events, or other facts.” The company’s rapid growth and complex financial structure exacerbated the number of errors, Mills added.
Mills conceded that in a number of instances, “the company’s overall culture and ‘tone at the top’ were heavily focused on meeting external and internal financial expectations.” The company also acknowledged that certain errors reflect “a lack of competence and in some instances a failure of communication and inadequate internal controls.” They include:
• failure to recognize a foreign currency gain
• failure to recognize the implications of put provisions in joint venture agreements when interests in the joint venture were sold
• errors in the accrual of compensation expense for long-term incentive compensation
• incorrect recognition of development and leasing fees and/or interest received but capitalized at the joint venture project level under FIN 46R, Consolidation of Variable Interest Entities
• failure to properly account for the “swap” of sites for the company’s so-called “Meadowlands Xanadu” project
Mills asserted in its filing that “the relevant factual background and accounting treatment for these items were not concealed from review at the time the accounting judgments were made,” and so in the judgment of the audit committee, most of the errors it examined “appear not to have resulted from an intention to reach an inappropriate accounting result.”
A relatively small number of errors, the filing acknowledged, were “caused by possible misconduct by former accounting and asset management personnel,” including, in at least one instance, through management override.
Mills also noted that over the past year it has undergone “a near-complete change of senior management personnel, as well as the departure of numerous other employees.” Recent hires include Richard Nadeau, a former finance chief of Colt Defense as well as an audit partner at KPMG and Arthur Andersen, named by Mills last April to succeed then-current CFO M.J. Morrow. And in September, chief executive officer Laurence Siegel resigned and was succeeded by Mark Ordan. (The latest Mills filing stressed that the company’s investigation does not raise concerns “with regard to the integrity, competence, or conduct of any of the company’s current management personnel.)
Mills also warned in its regulatory filing that if it does not come up with about $1.1 billion by March 31, it may be required to sell assets, to recapitalize, to sell the company, or to seek bankruptcy protection.
In January 2006, shortly after an earlier restatement announcement by Mills, the Securities and Exchange opened an informal inquiry into the company; the SEC later Last fall, Mills sold its interests in three international properties — Vaughan Mills, Ontario; St. Enoch Center, Glasgow; and Madrid Xanadu — to Canadian competitor Ivanhoe Cambridge for approximately $988 million. In announcing the sale, Mills executives reiterated their efforts to sell all or part of the company’s assets.