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.
KPMG disclosed late on Monday that it had fired the partner, who was based in Los Angeles, for providing inside information to an unidentified individual who then traded in shares of several West Coast companies. The firm did not name the fired partner, but described the person as having led accounts for some clients in the region.
The accounting firm did not name the companies whose confidential information was disclosed as part of the scheme.
A call to a spokesman for Herbalife was not immediately returned.
The episode will be another black eye for KPMG, which barely avoided criminal prosecution a few years ago because of the tax shelters it marketed. At the time, it was widely believed that the prospect of losing one of the four remaining large firms helped persuade the government not to seek a conviction.
Herbalife responded as follows during the day:
LOS ANGELES 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.
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