Did Fake Purchase Orders Lead to CFO’s Ouster?

International Rectifier gives more details on its accounting woes, but won't say specifically why its CFO was fired.

Both of Dancer’s and Pahl’s names were on the August 31 filing outlining the Japanese subsidiary’s problems and the effect it has on IR’s financials. The subsidiary “circumvented established controls and processes to record false or premature sales by creating fictitious customer purchase orders in the existing control system,” the filing noted. These orders and subsequent shipments were not reflected in the company’s books until a real order was placed.

When the subsidiary received “an actual” customer purchase order, the company filled the request from the inventory in the so-called off-books warehouses. The customer service department used a separate database to keep track of the orders. If a real order could not be filled, then the subsidiary would place the order though the company’s “normal” purchase system. IR further admitted that part of the cash received from customer for actual accounts receivable was applied to fictitious accounts receivable.

To fix the acknowledged material weakness in Japanese subsidiary’s internal controls, IR has made several changes, such as implementing new controls for inventory, order processing, and accounting. IR has also placed some Japanese managers on administrative leave and conducted a physical count of its inventory in the off-books warehouses, valued at $16 million as of April. The company has also assigned an interim controller to the subsidiary.

The company also acknowledged that it found issues with transfer pricing and other tax issues during fiscal years 2002-2007 while getting ready to adopt FIN 48, the Financial Accounting Standards Board’s rules for accounting for uncertain tax positions. The company is reviewing its potential tax liabilities, credits, and other related matters and says it may have to restate its recorded tax liabilities and tax provisions for the previous years, including the first two quarters of fiscal year 2007.

IR has also decided to reclassify charges taken for restructuring initiatives it undertook in December 2002. The company had been recording some of the related amounts as “impairments of assets, restructuring, severance, and other changes” when it should have put then in other line items of its income statements or disclosed them in footnotes. The company’s impending restatement will reflect this change, but the company does not expect it to materially affect its past results.

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