Global accounting firm KPMG LLP Tuesday resigned as the independent auditor for health care group Herbalife Ltd. (HLF) and footwear retailer Skechers USA, Inc. (SKX), following alleged insider trading by one of its former senior partners in the securities of these firms.
The former partner is said to have provided inside information of these firms in exchange for money to an outsider who used it to trade stocks. He was until April 5 the KPMG engagement partner on both Herbalife's and Skechers' audit.
KPMG reportedly fired the lead audit engagement partner and has confirmed that it has no reason to believe there were any problems with the financial reports of Los Angeles, California-based Herbalife or Manhattan Beach, California-based Skechers.
However, KPMG notified Herbalife that as its independence had been impaired, it had no option but to withdraw its audit reports on Herbalife's financial statements for fiscal 2010, 2011 and 2012 and the effectiveness of internal control over financial reporting for the same period. Skechers' financial reports for fiscal 2011 and 2012 have also been withdrawn by KPMG.
The KPMG former partner is currently under federal investigation for providing non-public information of his clients to a third party in exchange for money. The audit partner admitted that Skechers and Herbalife were among several West Coast companies whose non-public information was provided to a third party for money.
Following the developments, KPMG determined that its independence has been impaired and it must resign as Herbalife and Skechers auditors immediately and withdraw its auditors' reports for the fiscal years 2011 and 2012.
"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," Skechers COO and CFO David Weinberg said in a statement.
Herbalife said it is withdrawing the proposal to ratify the appointment of KPMG as its independent registered public accountants for fiscal 2013 as originally planned, while Skechers has immediately started to search for replacement auditors in an effort to have them in place as soon as possible.
Skechers is unable to provide an estimate of when the re-audit of fiscal years 2011 and 2012 will be completed. The firm said it is eager to hire a new audit firm as it prepares to announce positive financial results for the first quarter of fiscal 2013.
Meanwhile, Herbalife has confirmed KPMG's resignation as the company's auditor and said KPMG's withdrawal of its prior audit opinions would not result in a default under Herbalife's existing credit facilities.
KPMG is a global network of professional firms providing Audit, Tax and Advisory services. It has more than 152,000 outstanding professionals working together to deliver value in 156 countries.
HLF closed Tuesday's regular trading session at $36.95, down $1.44 or 3.75% on a volume of 5.88 million shares. In the past 52-week period, the stock has been trading in a range of $24.24 to $73.00.
SKX closed at $21.91, up $0.40 or 1.86% on a volume of 0.75 million shares. In the past 52-week period, the stock has been trading in a range of $12.73 to $22.61.
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