(UPDATE) KPMG to Resign as Herbalife’s Auditor; Who’s Next? A: Skechers

Posted on by Caleb Newquist

~ Several updates below including the name of the partner fired by KPMG and statements from Herbalife and Skechers.

That was fast. The New York Times reports that the KPMG will be resigning as the auditor of Herbalife:  

Herbalife is poised to disclose on Tuesday that KPMG will have to resign as the company’s auditor, after the accounting firm fired a senior partner, according to a person briefed on the matter. Herbalife shares were halted for trading because of news pending on Tuesday morning.
Oddly enough, Herbalife's board had just unanimously ratified KPMG as their auditor in a filing last week. The firm earned $3.9 million in audit fees for 2012 and $3.8 million according to the filing. Things are developing obviously, but according to Times report from last night the firm would be resigning as the auditor of two companies due to its compromised independence. As of now, there are no reports about who the partner or the second audit client is.
 
We'll continue to update this post as we learn more. If you have any information, email us.

UPDATE: Here's Herbalife's statement:

Herbalife (NYSE: HLF) today announced that KPMG LLP notified Herbalife on April 8, 2013 that KPMG was resigning, effective immediately, as Herbalife's independent accountant. KPMG stated it 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.

None of KPMG's audit reports on Herbalife's financial statements for the fiscal years ended December 31, 2010, 2011 and 2012 or KPMG's audit reports on the effectiveness of internal control over financial reporting as of December 31, 2010, 2011 and 2012 contained an adverse opinion or a disclaimer of opinion, nor was any such report qualified or modified as to uncertainty, audit scope or accounting principles. In addition, at no point during the three fiscal years ended December 31, 2012 and the subsequent interim period through April 8, 2013 were there any (1) disagreements with KPMG on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedures, which disagreement(s), if not resolved to the satisfaction of KPMG, would have caused it to make reference to the subject matter of the disagreement(s) in connection with its reports, or (2) "reportable events" as such term is defined in Item 304(a)(1)(v) of Regulation S-K.
 
As a result of the alleged insider trading activity by its now former partner and KPMG's resulting resignation on April 8, 2013, KPMG notified Herbalife that KPMG's independence had been impaired and 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.
 
As a result of the matters described above, Herbalife will be withdrawing the proposal to ratify the appointment of KPMG as Herbalife's independent registered public accountants for fiscal 2013 originally planned to be submitted to Herbalife's shareholders at Herbalife's Annual General Meeting of Shareholders to be held on April 25, 2013.
The SEC filing is now available on the EDGAR as well.
 
UPDATE 2: And after much anticipation, here's Skechers' press release:
SKECHERS USA, Inc. (NYSE:SKX), today announced that KPMG, LLP resigned yesterday, April 8, 2013, as independent auditor of Skechers due to misconduct by KPMG’s lead Audit Engagement Partner on the Skechers account. In connection with its resignation, KPMG has publicly stated that it has “no reason to believe that the financial statements of Skechers have been materially misstated.”
 
David Weinberg, Skechers Chief Operating Officer and Chief Financial Officer, stated, “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. Nonetheless, it is an unfortunate development at a time when we are preparing to release earnings for the First Quarter of 2013, a quarter which, like the Fourth Quarter of 2012, we believe will show significant growth and the continuing strength and viability of our business. We are working diligently to replace KPMG as quickly and efficiently as possible as we look forward to releasing positive results for the first quarter of 2013 later this month.”

And by diligently, they mean "We're listening to offers right now!" The first quarter just ended; that 10-Q isn't going to review itself now, is it?

UPDATE 3: DealBook reports that Scott London, the now ex-partner in charge of audit in L.A., is the person being investigated by the FBI:

Skechers added that, according to KPMG, the former partner in question – Mr. London — was cooperating with authorities.

Mr. London could not immediately be reached for comment. He worked at KPMG for 29 years, according to a profile on LinkedIn. He serves as chairman of the L.A. Sports Council and sits on the board of directors of the Los Angeles Area Chamber of Commerce.

UPDATE 4: Still no 8-K from Skechers, but in case you're curious, their audit fee for 2011 was $1.7 million according to last year's proxy. So altogether that's nearly $6 million in fees that KPMG's L.A. office just lost and will not be getting back. That could be a problem.

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kpmg_pink.gifAll right Klynveldians, we don’t know which one of you was a little generous with the letterhead but you’ve really done it.
Jeremy Blackburn, COO and President of Canopy Financial was able to raise $75 million for Canopy Financial based on bogus audit reports he provided to investors and pocketed more than $2 million for himself, according to the SEC’s complaint against Blackburn and the Company.


We’ll give the man cred ew the script:

Blackburn sent [Canopy CEO, Vikram] Kashyap an email dated June 30, 2009, attaching the KPMG Audit Report and the audited Canopy financial statements, with an email subject heading of “Audit Finally Complete,” and email text stating “I never wanna [sic] go through this again!!”

Kashyap apparently wasn’t in on the little secret that KPMG was not engaged to audit squat for Canopy. Nice work staying on top of everything, Vik. Meanwhile, Canopy’s investment bank, Financial Technology Partners, didn’t need an email telling them the audit was hell. They just ran to VCs with the notion that everything was on the up and up.
The bank is all bent out of shape because they’re taking heat and claim ‘We clearly had no clue about any such wrongdoing.’ Who wants to bother with the auditors? As Michael Arrington of Tech Crunch notes, “A 10 second phone call could have cleared this up before investors plowed $85 million into the company.”
The whole thing finally went south when Canopy’s new general counsel contacted an acquaintance at KPMG to help him find a new CFO. Canopy’s general counsel then sent over the “audit report.”

KPMG quickly responded to Canopy and advised Canopy in a “Cease-and-Desist Demand” letter dated November 3, 2009, that Canopy used KPMG’s name without KPMG’s authorization and consent. Further, KPMG told Canopy that it: (1) had never been retained nor agreed to audit any of Canopy’s financial statements; and (2) did not issue the audit opinion dated June 29, 2009. KPMG demanded, among other things, that Canopy “immediately CEASE AND DESIST from using the subject report and/or the unauthorized use of the KPMG name….”

It’s seems obvious that KPMG did nothing wrong here but this is still a big bowl of awkward. The firm’s name is all over the complaint and who knows how many other companies are running around with the firm’s letterhead throwing their “audited” financials around.
As we’ve indicated, this may call for a completely new look for KPMG. That means no more blue squares. We realize that’s a horrifying thought but the whole firm may be compromised. If you’ve got suggestions for the look (other than pink) or any thoughts on this snafu, discuss in the comments.
UPDATE: A tiny clarification/correction here: The original post over at Tech Crunch states, “Multiple sources have told us that Canopy was absolutely making up their financial statements, even forging audited statements with fake KMPG [sic] letterhead.” One could get the impression from our post here that genuine KPMG letterhead was used. That does not seem to be the case. The SEC’s complaint states that the audit report was “falsified” or “forged” without mentioning the authenticity of letterhead.
Nevertheless, we still stand by our conclusion that the Firm has no choice to either revisit stationery controls (since it’s obvious you can’t just get the shit anywhere) or change the entire logo as a precautionary measure. Similarly, we will continue to address this particular scandal as “Letterheadgate” to best follow the tradition of any scandal happening in the post-Nixon era to be suffixed with “gate”. We’re done here.
Canopy Complaint.pdf
Canopy Financial Turns Into Sad, Comical Game Of Hot Potato [Tech Crunch]
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