Washington (May 13, 2004) -- The Securities and Exchange Commission settled charges this week against apparel manufacturer The Warnaco Group Inc., three of its top executives and its former auditor, PricewaterhouseCoopers.
All of the parties agreed to the settlements without admitting or denying the SEC's allegations.
Warnaco was charged with securities fraud for issuing a false and misleading press release about its financial results in March 1999. The SEC said that the press release, which reported "record" results for 1998, failed to inform investors that it had discovered a $145 million inventory overstatement that would require the company to restate and significantly lower its financial results for the prior three years. Instead, the SEC said, Warnaco falsely characterized the inventory restatement as the write-off of deferred start-up costs under a new accounting pronouncement. The SEC said that the overstatement was actually caused by serious defects in the company's inventory accounting and internal control systems.
A month later, Warnaco filed its annual report for 1998, which the SEC said accounted for the $145 million restatement, but failed to inform investors of the true cause of the restatement, instead claiming that the restatement resulted from the write-off of "start-up related" costs.
The SEC charged PwC, Warnaco's audit firm at the time, with aiding and abetting Warnaco's reporting violations in the 1998 annual report. The SEC said that the Big Four firm, which audited the financial statements in the 1998 annual report, failed to object to Warnaco's mischaracterization of the inventory overstatement and incorporated the misleading description of the restatement into its audit report. PwC paid $2.4 million to settle the charges. The settlement is subject to court approval.
Warnaco's former chief financial officer, William Finkelstein, was charged with aiding and abetting the company's fraud. Warnaco, Finkelstein, former chief executive Linda Wachner and former general counsel Stanley Silverstein were charged for their roles in connection with Warnaco's misleading disclosure in its annual report for 1998. The SEC said that Wachner, Finkelstein and Silverstein knew or should have known that the restatement resulted from material flaws in the company's cost accounting and internal control systems at one of its divisions. Nevertheless, all three approved the annual report, and Wachner and Finkelstein signed it, the SEC said.
Antonia Chion, an associate director of the commission's Division of Enforcement, said that the settlement "has reiterated to issuers, their management, and audit firms that simply 'getting the numbers right' is not enough."
The commission issued cease-and-desist orders against Warnaco, Wachner and Silverstein for reporting and other federal securities laws violations, and censured Silverstein and PwC.
Under the agreement, Warnaco must hire an independent consultant to perform a review of its internal controls and policies relating to its inventory systems, internal audit, financial reporting and other accounting functions. Warnaco has to adopt the recommendations of the independent consultant within 180 days.
Finkelstein agreed to give up a 1998 bonus of $189,464 and prejudgment interest, and to pay a $75,000 civil penalty. He also agreed to be barred from acting as an officer or director of a public company for four years. Wachner and Silverstein agreed to give up 1998 bonuses and prejudgment interest totaling $1,328,444 and $165,772, respectively.
-- WebCPA staff
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