January 16, 2021

High & Low Finance: A Plot Twist at Herbalife Draws in the Auditors

Herbalife lost its auditor, KPMG, this week after it was revealed that Scott I. London, the partner in charge of the audit until he was fired, had been providing inside information about Herbalife and the shoe company Skechers to a frequent golf partner who was trading on the tips.

The audit firm decided that it would not only resign as auditor at Herbalife and Skechers, whose audits Mr. London also led, but would also withdraw its certification of the old audits, even though it said it had no reason to doubt the accuracy of the reviews. That left the two companies scrambling to find new auditors who will have to reaudit results from recent years, an expensive and time-consuming process.

Skechers presumably will have no trouble getting one of the other Big Four firms — PricewaterhouseCoopers, Deloitte Touche and Ernst Young — to take over its audit. And it seems reasonable to think that KPMG will end up paying the extra costs, since it was the misconduct of its partner that led to the mess.

But it will be interesting to see which firm signs on as Herbalife’s auditor. When an auditor is selected, that firm will be under close scrutiny by the participants in the Herbalife stock market war being fought by hedge funds. That war pits Bill Ackman of Pershing Square Capital Management, who has loudly shorted the stock, against Daniel S. Loeb of Third Point, who bought the shares after Mr. Ackman disclosed his position. Carl C. Icahn, who has an unrelated complaint with Mr. Ackman, has also leapt in to buy the stock.

Financial statements are not at the heart of Mr. Ackman’s argument that Herbalife is an illegal pyramid scheme that will be the target of federal regulators. But he has complained about inadequate and misleading disclosures. It is at least conceivable that an auditor might seek to force additional disclosures.

All audit firms have risk groups that review new business, including the quality of the company to be audited, and that decide that some prospective clients are not worth the risks. It will be interesting to see if any of the other major firms conclude that the risks are acceptable, particularly given that Herbalife’s 2012 audit fee was under $4 million, which is not a large sum to a major firm. If Herbalife turns to a second-tier audit firm, it will be embarrassing to the company.

Then there is the issue of conflicts of interest. Any audit firm that did certain types of consulting work for Herbalife over the last three years might be disqualified, since the new auditor will have to review those periods.

Herbalife’s annual meeting is April 25, and it no doubt would like to have the new auditor on board by then.

Some studies have indicated that financial restatements are more likely when a new auditor is brought in, but the data involved makes it hard to know if there is a causal connection. After all, as a general rule auditors are changed only when either the client or the audit firm is unhappy about the relationship, and a dispute over accounting or even suspicion of management may be at the heart of such a split.

There is no evidence of such a split here. KPMG has been the company’s auditor since before the company went public in 2004, and the two seem to have been getting along fine. If Herbalife’s new auditor does seek to force a restatement, that will be seized upon by advocates of mandatory auditor rotation as support for their argument that auditor independence is inevitably compromised by long tenures of the incumbent firm, and that companies should be required to change firms every decade or so. Such a requirement is fiercely opposed by the accounting industry, but it has been approved by the Dutch Parliament for companies in the Netherlands.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Article source: http://www.nytimes.com/2013/04/12/business/a-plot-twist-at-herbalife-draws-in-the-auditors.html?partner=rss&emc=rss

Apple Retail Executive to Lead J.C. Penney

The Apple executive, Ron Johnson, will replace Myron E. Ullman III as Penney’s chief executive on Nov. 1, the retailer announced. Mr. Ullman will then take a role as executive chairman.

“In the U.S., the department store has a chance to regain its status as the leader in style, the leader in excitement,” Mr. Johnson, 52, said in an interview. “I saw a very shared vision amongst the board to really take this great American brand and make it become something unbelievably exciting.”

He added, “It will be a period of true innovation for this company.”

Penney first contacted Mr. Johnson three or four years ago, Mr. Ullman said. That was about the time that the chief of merchandising and second-in-command at Penney, Ken C. Hicks, resigned; Mr. Hicks was not replaced. It is unclear whether Penney had contacted Mr. Johnson about Mr. Hicks’s position, about a board position, or about another job.

This time, the wooing of Mr. Johnson started with the two activist investors who joined Penney’s board in January. In November, the investor groups, Pershing Square Capital Management and Vornado Realty Trust, bought 26.4 percent of Penney stock. In January, William A. Ackman from Pershing and Steven Roth from Vornado joined the Penney board, and as part of that arrangement, got to appoint an additional director.

“It wasn’t until this year, when our two new investors had the right to appoint a third investor, that they reached out to Ron about getting him to take a board seat, with the hidden agenda of getting him to be my successor,” Mr. Ullman said.

“Bill Ackman and Steve Roth had the initial contact with the search firm,” he added, but “every single member of the board was involved in the recruitment.”

For his part, Mr. Ackman said, “Ron Johnson is the Steve Jobs of the retail industry.”

Mr. Johnson has gotten widespread credit for being the mastermind of Apple’s hugely successful retail strategy. He came to Apple in 2000, when the company was struggling to survive. When it opened its first store in Tyson’s Corner, Va., just over 10 years ago, Apple’s foray into retailing was received with heavy skepticism. But Apple defied critics.

Computers had previously been sold at drab big-box stores, but Apple came in with stores designed with glass and steel. It invited passers-by in to check their e-mail or play around on new gadgets, offered accessible technical support at stations dubbed “Genius Bars,” and held one-on-one training sessions and group workshops on how to use Apple’s products.

The stores, now numbering more than 300 worldwide, bring in a constant flow of both Apple loyalists and new customers attracted by the company’s ever-expanding array of hits, like the iPod, iPhone and iPad. “They turned retail upside down,” said Charles Wolf, an analyst with Needham Company. “Instead of filling shelves with items, they built this Zen-like environment. They created a unique experience and became a community for Mac owners.”

Analysts and investors cheered the hire, with shares rising more than 17 percent to close at $35.37.

“I really think this is a game changer,” said Deborah Weinswig, a retail analyst for Citi. “We’re at a very interesting kind of intersection right now where retail needs to be fun, it needs to be exciting, because the consumer doesn’t need to go to the store — they can do everything from their office or from their home.” What Apple has done “in terms of retail is absolutely unbelievable, so if he can take a little bit of that magic and sprinkle it on to J.C. Penney, you could really create the next generation of retailing,” she said.

Mr. Johnson did not specify what his plans were for Penney.

“I don’t have a priority list,” he said. “I have so many ideas in my head that I can’t quite sort them out, to tell you the truth.”

As for his experience at Apple, he said: “Apple has taught me, really, what breakthrough innovation is and how to energize teams to accomplish that. I’ve seen that happen on the product side at Apple; we’ve done that in our stores. I think that’s what I bring.”

Michael J. de la Merced and Miguel Helft contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=8c227cd825bfddce46aa614ac8e383ec