Marcum Has Some Doubts About American Apparel’s Ability to Continue Selling Gold Lamé Leggings
Bad news for Dov Charney’s hipster retail paradise as Marcum – who replaced Deloitte last summer – has issued its auditor’s opinion with the language that no one likes to see.
But before we get to that, if you take a quick glance at the balance sheet you’ll see that the company barely has enough money to keep the lights on as their working capital is a measly $3 million (current assets of $216 million, current liabilities of $213 million). This shockingly bad number is mostly due to the $138 million in revolving credit facilities the company has included in its current liabilities. The company is also shows an accumulated deficit of over $73 million in its equity section. APP also bled over $32 million in cash from operations, according to its cash flow statement. All this bad news has lots of people talking about bankruptcy and that doesn’t touch the thirteen (that’s Gawker’s count, I only saw twelve) ongoing lawsuits against the company. Plus there’s the subpoena the company received from the U.S. Attorney General for SDNY last August over their auditor switcheroo.
We could go on and on but you get the pic. Here’s the final paragraph from Marcum’s opinion in APP’s 10-K:
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred a substantial loss from operations and had negative cash flow from operations for the year ended December 31, 2010. As a result of noncompliance with certain loan covenants, debt with carrying value of approximately $138.0 million at December 31, 2010, could be declared immediately due and payable. Notwithstanding the foregoing, the Company has minimal availability for additional borrowings from its existing credit facilities, which could result in the Company not having sufficient liquidity or minimum cash levels to operate its business. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plan in regard to these matters is also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Obviously the bad news is that investors are really spooked but the good news is that there could be a serious fire sale on hoodies and t-shirts in our future. Silver lining!
American Apparel Takes Issue with Deloitte’s Notion That Management Withheld Some Fairly Important Financial Statements
Remember the hipster drama Deloitte caused this past summer when they resigned as the auditor of American Apparel? It was quite the r s the stock took a beating (it has recovered in the meantime) and questions were raised about the company’s ability to continue as a [g]oing [c]oncern.
Some recent developments in this particular story have come to light as Dov & Co. have been providing a whole mess of information to Deloitte, as is SOP in these matters. For starters, Deloitte notified the APP audit committee that the 2009 financial statements are not kosher and anyone using them for any other purpose than lining a bird cage is nuts.
From the 8-K:
On December 15, 2010, the Audit Committee of the Company received notice from Deloitte stating that Deloitte had concluded that Deloitte’s report on the Company’s previously issued consolidated financial statements as of and for the year ended December 31, 2009 (the “2009 financials”), including Deloitte’s report on internal control over financial reporting at December 31, 2009, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 (such reports, collectively, the “Deloitte Reports”) should not be relied upon or associated with the 2009 financials.
Deloitte explained that its conclusion was based on the significance of the declines in operations and gross margin in the Company’s February 2010 monthly financial statement, combined with the January 2010 monthly financial statements, the Company’s issuance of revised projections in early May 2010 which reflected a significant decrease in the Company’s 2010 projections, and Deloitte’s disagreement with the Company’s conclusion that the results shown in the February 2010 monthly financial statements would not have required a revision to the Company’s projections as of the date of the 10-K filing and the issuance of Deloitte’s reports. Deloitte further indicated that their decision considered their inability to perform additional audit procedures, their resignation as registered public accountants and their professional judgment that they are no longer willing to rely on management’s representations due to Deloitte’s belief that management withheld from Deloitte the February 2010 monthly financial statements until after the filing of the 2009 10-K and made related misrepresentations.
So if you can get past how poorly written these paragraphs are, you can boil down Deloitte’s concerns about the 2009 10-K to a few things: 1) business was not looking good; 2) they didn’t buy APP’s notion that financial projections for February ’10 were hunky dory (which weren’t made available until after the 10-K was filed); 3) APP management was more or less full of shit. You can also read their official letter to the company, if you are so inclined.
You won’t be surprised to learn that Dov & Co. have a difference of opinion here:
The Audit Committee of the Company has commenced an investigation into the assertions that management withheld the February 2010 monthly financial statements and related misrepresentations. Management disagrees with Deloitte’s assertions and does not believe that the February 2010 monthly financial statements were withheld. The Company does not currently believe, including after discussions with Marcum, that the reaudit will result in any changes to the 2009 financials, though no assurance can be given in this regard.
So, somewhere, there are February 2010 financial statements stuffed in a drawer (but whose drawer?) that basically caused this whole fiasco. This seems like a completely plausible scenario.
Accounting News Roundup: Big Names Oppose Proposed Washington Tax; American Apparel Names Acting President; Oregon Gubernatorial Candidate Donates Home and Gets Burned | 10.08.10
SEC Accuses CHiPs Actor, Others Of Securities Fraud [Dow Jones]
“In complaints made public on Thursday, the SEC alleges that the actor, Larry Wilcox, and more than a dozen other penny stock promoters engaged in a series of kickback scheme volume and price of microcap stocks and illegally generate stock sales.
Wilcox, who starred as Officer Jon Baker on the long-running television show “CHiPs”, lives in West Hills, Calif., and is president and chief executive of The UC Hub Group, according to an SEC complaint filed in U.S. District Court for the Southern District of Florida.”
Microsoft, Boeing, Amazon Line Up Against New Washington Tax [Janet Novack/Forbes]
“The Washington State fight over whether to impose a new income tax on well-to-do residents heated up Wednesday, as the group opposing the tax released a list of employers that have joined the anti-tax cause. Companies on the list include Microsoft, Boeing, Amazon, Weyerhaeuser and Safeco Insurance.
The tax, which will appear as Initiative 1098 on the state’s November ballot, would impose a 5% tax on income of more than $400,000 per couple and a 9% levy on income exceeding $1 million per couple.”
Rep. Levin: Fate of Bush tax cuts unknown [On the Money/The Hill]
This does not sound good: “The Senate is expected to move first on the issue, but Levin said even that was not certain.
‘It’s preferable that the Senate act first because we’ve seen that if they can’t act first they won’t act second because the Republicans block it and don’t provide the 60 votes,; he said, adding, ‘I think we’ll have to wait and see.’ ”
American Apparel names Tom Casey as acting president [Reuters]
Tom Casey just left the terminal case known as Blockbuster in August.
SBA Loans Jump, Despite Unsteady Year [WSJ]
“Small-business lending still hasn’t bounced back to pre-recession levels. But despite a rocky year, the number of loans backed by the Small Business Administration jumped about 30% in 2010.
The agency, which ended its fiscal year Sept. 30, says it approved $16.84 billion, or 54,826 small business loans, in the past 12 months. That’s up from fiscal 2009, when the SBA backed about $13.03 billion during the depths of the credit crunch. In 2007, the agency backed about $20.61 billion.”
Oregon Gubernatorial Race Roiled by Candidate’s Charitable Deduction for Donation of Home to Fire Department [TaxProf Blog]
You try and do something nice…
FASB Advances EITF Proposals on Goodwill, M&A [A&A Update/Compliance Week]
“The Financial Accounting Standards Board is proposing new updates to the Accounting Standards Codification around goodwill write-downs, business combinations, and revenue recognition for health care entities based on recommendations from its Emerging Issues Task Force.
In the proposal titled Intangibles – Goodwill and Other (Topic 350): How the Carrying Amount of a Reporting Unit Should Be Calculated When Performing Step 1 of the Goodwill Impairment Test, FASB and the EITF want to settle on one starting point for all companies to follow in deciding if goodwill needs to be written down.”
U.A.E. Drops Threat to Suspend BlackBerry [NYT]
Your vacation is back on.
Dov Charney’s Business Sense Doesn’t Include Reliable Financial Statements
“He flies in the face of business sense, fashion manufacturing and retailing sense.”
~ Bryan Roberts, research director for retail analysts Planet Retail, couldn’t get through to Deloitte in time with this message.
Accounting News Roundup: The Problem with American Apparel’s non-CPA CFO; Diversity Still Lags in Accounting; Patrick Byrne Denies Insider Trading Accusations | 08.23.10
Potash says in talks for superior deals [Reuters]
“Potash Corp’s board urged shareholders to reject BHP Billiton’s hostile $39 billion offer and said it was in talks with a number of potential suitors for a superior deal.
Potash Corp, the world’s largest producer of potash based in the Canadian province of Saskatchewan, said superior offers or other alternatives are expected to emerge.
Discussions are on with several of these third parties in order to generate superior offers, the company said in a statement.”
How to Shine in a Skype Interview [FINS ying across the country for a second round of meetings, you may be asked to interview for a job from the comfort of your living room.
While it might sound less stressful to some than an in-person meeting, such an interview can be filled with landmines for job candidates.”
The Problem With a Non-CPA CFO [FEI Financial Reporting Blog]
Francine McKenna guest-posts over at FEI for the second time, this time discussing the American Apparel situation and noting that 31 year-old CFO might be in over his head.
Goldfarb Branham LLP Investigating Shareholder Claims Against American Apparel, Inc. [Business Wire]
Speaking of APP, investigations are starting, “Goldfarb Branham LLP is investigating American Apparel, Inc. (APP 0.75, 0.00, -0.09%) due to allegations that the company may have issued materially inaccurate statements to investors concerning its 2009 financial results and the circumstances surrounding the replacement of American Apparel’s auditor.”
Movement afoot to increase diversity in accounting industry [Pittsburgh Business Times]
“Sam Stephenson, a partner at ParenteBeard LLC, a Downtown-based certified public accounting firm, brings an interesting perspective to the equation as a black man who has worked in the profession for nearly four decades. During his long tenure, he has seen improvements in efforts to recruit and promote women in the profession, but ethnic diversity still lags behind.
‘We need to bring this issue to the attention of individuals who run local and regional firms because they may not be aware that this is a problem,’ said Stephenson, who serves as a member of the Pennsylvania State Board of Accountancy, which enforces the licensing rules for CPAs. ‘A lack of diversity often means missed opportunities to attract talent and clients.’ ”
Preparer Costs Will Increase Some; Taxpayer Costs Will Increase More [Tax Update Blog]
Joe Kristan responds to fellow practitioner/blogger Robert Flach’s question of how the new tax preparer registration will affect costs for consumers more so than tax preparers.
Gays See Complex, Changing Tax Picture [Dow Jones Adviser]
“Gay couples are taking one step forward, one step back when it comes to their tax rights. Not to mention sideways.
The shifting landscape of new rules and initiatives makes it a big challenge to provide same-sex partners with good tax advice.
In Massachusetts, a successful challenge to a federal law denying gays tax breaks that heterosexual couples get could mean progress, but only if it stands up to an expected government appeal.”
Patrick Byrne Refutes Insider Trading Claims [Forbes]
And If Only American Apparel Hadn’t Burned Through All That Cash, They Could Have Made Bigger Campaign Contributions
“If it weren’t for the immigration bust by the Obama administration, the company would have been OK this year.”
~ “[A] source close to American Apparel” quoted in the Post obviously isn’t familiar with the company’s debt position.
Hey Media, Leave the Accounting To Us Mmmkay?
When Going Concern first launched a year ago, I know we heard more than a few chortles from the audience at the very idea of an accounting news site (or tabloid, depending on who you ask) because, really, how interesting can accounting be? Of course we’ve since learned that cube-dwellers, financial professionals, college kids and accounting enthusiasts are totally into what we do because no one was doing it before and someone had to.
It’s easy to forget that we’re not only utilizing this avenue to rip on obvious boneheads who try to manipulate our precious accounting (we’re talking to you, Patrick Byrne) and make fun of idiot celebrities who don’t pay their taxes but also to bring an accounting awareness to the world at large. It’s not all number-crunching and despite the stereotypes that we ourselves perpetuate, we’re also providing a service by making the obscure world of accounting digestible to non-accountants.
Which is pretty much the entire reason why other media outlets need to back off and leave the really super complicated reporting to us if they’re going to get into things they don’t understand.
Case in point, American Apparel.
The headline was really that American Apparel has been taking the active accounting defense stance lately, getting fired by Deloitte (hint if you’re not into the accounting: that doesn’t happen very often. The other way, perhaps, but the auditors very rarely get spooked and bail like that), rapidly bleeding precious capital and sort of “forgetting” to file important check-ins with the SEC. Oops. That’s where the doubt arises in “going concern doubt”.
In fairness to some media outlets, not everyone bumbled the headline. But for these two, we need to define the term “going concern.” This might be too hipster ironic, even for me.
Thanks, InvestorWords, I’m too lazy to type out this definition myself:
The idea that a company will continue to operate indefinitely, and will not go out of business and liquidate its assets. For this to happen, the company must be able to generate and/or raise enough resources to stay operational.
And then we can get into American Apparel’s future a ‘going concern’ via Marketplace and American Apparel Warns of ‘Going Concern’ via the Los Angeles Business Journal. Yeah, to clarify: that’s what we want, American Apparel has the doubt part to worry about, which was conveniently linked to directly from AA’s preliminary 10-Q to the SEC. See, it’s laid out there for you, all you have to do is read it.
Anyway, I’m not annoyed when people like Emily Chasan write stories about this stuff because she knows what she’s doing. Caleb gets away with it because he knows what he’s talking about. I stick to what I know – ripping on regulatory agencies and bitching about the general state of the industry – and pull it off. There are a ton more accounting writers I could name (Bill at CPA Success, Rick at CPA Trendlines, Francine at Re: the Auditors, Professor David Albrecht, Jim Peterson at Re:Balance, blah blah blah) but I would end up leaving out quite a few talents and I’d hate to offend anyone. Ha.
My point is that you don’t have to be one of them to get the story right. That’s all I’m saying.
The irony of this is not lost on me. I don’t wear American Apparel dammit but I half dress like this awful stereotypical hipster. Don’t ask me what to wear on CPA exam day, I stick to what I know.
American Apparel Subpoenaed Over Auditor Switcheroo
American Apparel’s downward spiral continues as Bloomberg reports that the company has been subpoenaed by the U.S. Attorney for the SDNY over the company’s “change in accounting firms.”
If you’re just l started with Deloitte quitting as the auditors of APP late last month. At that time, Deloitte warned that the ’09 financial statements may not (read: definitely are not) reliable and that they were getting the hell out of Dov.
Former APP auditor Marcum – for reasons unbeknownst to us – went back to their old client to try and help them straighten things out. Here’s the latest from the “preliminary results” for the second quarter, while thetardy 10-Q remains elusive. These prelims (i.e. a wild stab?), that were filed today warn that things are likely to get worse before they get better:
Potential Restatement of previously issued financial statements
Effective July 22, 2010, Deloitte resigned as our independent registered public accounting firm. On July 26, 2010, we engaged Marcum as our independent registered public accounting firm. On July 28, 2010, we reported on a Form 8-K that we had been advised by Deloitte that certain information had come to Deloitte’s attention that if further investigated may materially impact the reliability of either Deloitte’s previously issued audit report or the underlying consolidated financial statements as of and for the year ended December 31, 2009 included in our Annual Report on Form 10-K for the year ended December 31, 2009. Deloitte has requested that we provide Deloitte with the additional information Deloitte believes it is necessary to review before any conclusions can be reached as to the reliability of the previously issued consolidated financial statements as of and for the year ended December 31, 2009 and auditors’ report thereon.
Depending on the outcome of this review, a restatement of our financial statements as of and for the year ended December 31, 2009 could be required. Any restatement may subject us to significant costs in the form of accounting, legal fees and similar professional fees, in addition to the substantial diversion of time and attention of our Chief Financial Officer, our other officers and directors and members of our accounting department in preparing and reviewing the restatement. Any such restatement could adversely affect our business, our ability to access the capital markets or the market price of our common stock. We might also face litigation, and there can be no assurance that any such litigation, either against us specifically or as part of a class, would not materially adversely affect our business, financial condition or the market price of our common stock.
But that’s not all! The company discusses a few more issues, “We are subject to regulatory inquiries, investigations, claims and suits. We are currently defending one wage and hour suit, one sexual harassment suit and responding to several allegations of discrimination and/or harassment that have been filed with the Equal Employment Opportunity Commission or state counterpart agencies.”
At that point, the filing finally gets to the problem du jour:
In addition, in connection with our previously disclosed change in auditors, on July 30, 2010, we received a grand jury subpoena from the United States Attorney’s Office for the Southern District of New York for the production of documents relating to the circumstances surrounding the change in our auditors. We have also received inquiries from the Securities and Exchange Commission regarding this matter. We intend to cooperate fully with these requests and any related inquiries.
If consider all that, plus the fact that the company is spending cash like Pacman Jones at a strip club and that they’re likely to be in noncompliance with a major debt covenants at September 30th, it’s no surprise that the stock is off even more than when Deloitte first quit as auditors.
American Apparel Drops After Receiving Subpoena on Change in Accountants [Bloomberg]
10-Q [SEC]
American Apparel Goes Two for Two: Q2 Filing Late, Q1 Still Pending
Fashion cannot be rushed people. Ask the gang at Fashionista. They’ll tell you.
However, it is still a business which sometimes includes dealing with auditors and other outsiders that want various documentation and whatnot that can simply be delayed if it hinders the creative process. That is, if you keep your company private.
But the second you want to give the American public the opportunity to invest in your skinny jeans, leggings, and thong tanks, you’re playing on the SEC’s turf. This means things happen on a schedule. Delays, excuses or pervy CEO behavior will not be tolerated if it results in late filings.
American Apparel expects to report a loss in the second quarter and requested additional time to file its financial report after the resignation of its auditor, Deloitte & Touche.
It is the latest bump for the hipster clothing chain. The company said in May that it expected a loss for the first quarter, but it hasn’t filed that quarterly report with the Securities and Exchange Commission either.
[…]
Deloitte & Touche resigned as American Apparel’s auditor after the accounting firm said it found material weaknesses in internal controls over financial reporting. Deloitte requested more information from the company to determine if there were problems in previous financial reports. American Apparel said Tuesday it was working to provide that information.
Dov! These 10-Qs are not optional! Plus, it doesn’t help that the financial data that you provide is less reliable than what the federal government issues.
Presumably Marcum was persistent (and comfortable) enough to get you to push the button before so what the hell man? You’ve got them back on your team so this should NBD. You best get the house in order before your stock gets banished to the sheets that are the same color as your undies.
American Apparel expects 2Q loss; request 2Q delay [Bloomberg BusinessWeek]
Earlier:
Deloitte Resigns as American Apparel Auditor; Hotness of Engagement Team Presumably Not an Issue
Deloitte Resigns as American Apparel Auditor; Hotness of Engagement Team Presumably Not an Issue
So for those of you that aren’t too fashion conscious, you probably don’t the name Dov Charney. He’s the Chairman and CEO of American Apparel and you’d be hard pressed to find something in one of his stores that qualify under your firm’s dress code.
Nevertheless! AA is a publicly traded company and is subje ities laws as everyone else. Last year they opted to drop Marcum as their auditor for Deloitte. One year later, the firm has apparently had all they can stand of AA because they resigned today, citing possibly unreliable financial statements for 2009, sending the company’s stock reeling.
The 8-K has the usual language that you would expect from a typical auditor/client break-up but here are the gory details for those you that enjoy that sort of thing (citations omitted and extra fun stuff is bolded):
During the period from April 3, 2009 through July 22, 2010, there were no “reportable events” except that (i) in Deloitte’s report dated March 31, 2010 (which was included in the 2009 Form 10-K) on the Company’s internal control over financial reporting as of December 31, 2009, Deloitte identified material weaknesses in internal control over financial reporting related to the control environment and to the financial closing and reporting process, which are further described under Item 9A in the Company’s 2009 Form 10-K, and advised that the Company has not maintained effective internal control over financial reporting as of December 31, 2009; and (ii) Deloitte advised the Company that certain information has come to Deloitte’s attention, that if further investigated may materially impact the reliability of either its previously issued audit report or the underlying consolidated financial statements for the year ended December 31, 2009 included in the Company’s 2009 Form 10-K. Deloitte has requested that the Company provide Deloitte with the additional information Deloitte believes is necessary to review before the Company and Deloitte can reach any conclusions as to the reliability of the previously issued consolidated financial statements for the year ended December 31, 2009 and auditors’ report thereon.
As we mentioned, this has spooked plenty of people, including Ed Yruma an analyst at KeyBanc quoted by Bloomberg in a letter to investors, “The company has struggled since its IPO with both its internal controls and its ability to file SEC filings on a timely basis. An ability to file SEC filings on a timely basis has been an ongoing issue.”
Back to the superficial. Dov Charney is, what you might call, a character. Here’s a brief chat we had with Nick, Breaking Media web developer and occasional contributor to our sister site Fashionista:
me: When i say the name
Dov Charney
your response is…
Nick: LECH
PERV
You only need to snoop around the web briefly (e.g. here, here, here) to pick up what Nick is referring to.
Deloitte’s letter to the SEC is brief and makes no mention about the plethora of models not wearing pants or Dov judging the young auditors’ hot or not-ness, so that likely wasn’t part of the problem. Anyhow, AA ran straight back to Marcum who might be more comfortable with, what we imagine to be, an interesting work environment.
8-K [SEC]
American Apparel Falls After Deloitte Resigns as Accountant [Bloomberg BusinessWeek]