Levi Leaves KPMG

This article is very sparse, and the subject matter relatively old.

It discusses the decision by Levi Strauss to change auditors, leaving KPMG for PriceWaterhouseCoopers.

With KPMG in charge, the Levi Strauss had suffered a number of issues relating to restatements and KPMG’s assertions about a lack of internal control, though the specific troubles were not current.

Finally, Levi Strauss replaced them, after the release of the 2006 10-K.

This change has been a long time in coming and mostly likely was delayed due to the earlier problems. From page 75 of the 2003 10-K:

We restated our annual and quarterly financial statements for 2001, 2002 and the first two quarters of 2003, we did not file our Quarterly Report on Form 10-Q for the third quarter of 2003 on a timely basis and we received a material weakness letter from our outside auditors raising questions about our ability to identify and report timely and accurate financial information; we may experience breakdowns in our internal controls.

These problems resulted in two class actions suits from bond holders who purchased the Company’s bonds in the period from January 10, 2001 to October 9, 2003. There were also suits for wrongful dismissal

What should be noted is what the weakness actually involved rather than the statement above. The company is not an ‘accelerated filer’, and as such not yet subject to the requirements of fiscal year 2008 (with respect to the management report) and fiscal year 2009 (with respect to the independent auditor attestation report). The key, of course is that the company is still owned by the founder’s descendants, though a trust. Four voting trustees have the exclusive ability to elect and remove directors, amend our by-laws and take other actions which would normally be within the power of stockholders of a Delaware corporation. See page 19 of 2006 10-K:

Our approach to corporate governance may lead us to take actions that conflict with our creditors’ interests as holders of our debt securities.

Our principal stockholders created the voting trust in part to ensure that we would continue to operate in a socially responsible manner while seeking the greatest long-term benefit for our stockholders, employees and other stakeholders and constituencies. As a result, we cannot assure that the voting trustees will cause us to be operated and managed in a manner that benefits our creditors or that the interests of the voting trustees or our principal equity holders will not diverge from our creditors.

Thus management states quit clearly the truism that equity and debt holders have divergent interest, but because of the ownership structure, management and the owners have the power to make the decision stick.

Here are some important points:

-KPMG acted very quickly on the control weakness issues, much before the law would have mandated. For that reason and that reason alone it would seem that the problems were sever enough to force the auditor to act before it would have been strictly required.

-The law suits by debt holders may have more validity than some, if only because of the stated owner view of creditor interest.

-The financial statements say: “We will be required to evaluate our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act. Note that the company has not done so as yet.

The following conclusions can reasonable be drawn from the information provided above:

-KPMG moved before they strictly had to on the internal control issue. It would appear then, that the situation was bad enough for them to take action very early on.

-Levi waited until the dust had settled to get rid of KPMG. United Technologies did the same when their auditors told them the same. I am sure there was some embarrassment factor operating.

-The company is in a no-growth situation and has been borrowing relatively more.

-Management is a law unto themselves, and sees no convergence of interest with the debt holders.

-The owners believe and probably do, have sufficient information to manage the company, and the internal control systems to provide it. That is not the same as being able to create proper financial statements. Until the new rules came on the horizon, KPMG was willing to go along.

What we have is a bit different circumstance, where KPMG took preemptive action in the face of various control problems, the scope of which still has not been determined.