Research firm Audit Integrity issued a negative report to investors and auditing firms about Starbucks Corp., warning that the coffee retailer rates poorly on several risk factors, including equity risk, class-action litigation and financial restatements.

“Starbucks has very aggressive accounting behavior,” said Audit Integrity CEO Jack Zwingli (pictured). He pointed to factors such as inventory turnover and receivables as red flags. “We’re not saying Starbucks is committing fraud, but that it is showing a pattern of behavior that is consistent with fraud,” he added.

Among the problems noted in the firm’s report are that Starbucks chairman Howard Schultz is also its CEO. Audit Integrity also sees problems in liability and regulatory issues, such as lawsuits in which the company was ordered to pay back tips it had taken from employees and to compensate fired baristas. Officer changes and restructuring, including the closure of hundreds of Starbucks outlets, have also contributed to the company’s low ratings.

The company defended its practices. “We have not seen the full report from Audit Integrity at this time," said a statement forwarded by Starbucks spokesperson Anna Kim-Williams.  "We are committed to doing business responsibly, and conducting ourselves in ways that earn trust and respect. This includes employing sound accounting and corporate governance practices, among other things.”


Other companies on the radar screen for Audit Integrity include Altria, Apple, Applied Materials, Chevron, eBay, General Electric, Google, Nasdaq, Pepsi and Tyco. The Los Angeles-based company has identified about 300 companies in North America that it rates as “very aggressive” in its Accounting and Governance Rating.

The firm has warned of excess inventory buildup at Apple, for example, although Zwingli acknowledged that Apple has argued it needed sufficient inventory of popular products such as the iPhone to meet customer demand.

Nevertheless, he pointed out, “Inventory spikes are often indicative of accounting manipulation.” His 15-employee firm is on the lookout for accounting manipulation of any kind. “There are a lot of levers in GAAP that you can pull to make your company look better,” said Zwingli.

Much of the information the firm sifts is from public filings and data from sources such as Reuters and Standard & Poor’s. Its reports primarily go out to insurance underwriters and auditing firms such as Ernst & Young and KPMG. The company also recently introduced a software product known as Risk Profiler that corporations and auditors can use to identify problem areas that could indicate accounting irregularities or outright fraud.

Zwingli says that his firm’s reports often act as early warning signs for clients. Previous reports have warned about troubled companies such as AIG, Merrill Lynch and New Century Financial. “The best-rated companies consistently outperform the market, and the worst-rated blow up,” said Zwingli.

Audit Integrity has begun working on rating European companies and is in the midst of compiling a report comparing International Financial Reporting Standards with U.S. GAAP. The “short-hand conclusion” so far, according to Zwingli, is that U.S. companies using GAAP come out ahead in terms of disclosure on areas such as executive compensation. Some countries in particular, such as the Netherlands, have fared poorly in their companies’ ratings, and Zwingli pointed out that there are differences among other countries such as the United Kingdom, France and Germany in their use of IFRS.