A Financial Scandal At American Apparel?

American Apparel's auditors resigned abruptly this summer, after announcing they had no confidence in the company's accounting structures or the reliability of its results. Now the ex-auditors have written to the SEC to dispute aspects of American Apparel's latest filing.

The auditing firm Deloitte & Touche's break with American Apparel this July was revealed in an SEC filing that stated, "Deloitte identified material weaknesses in [American Apparel's] internal control over financial reporting...and advised that the Company has not maintained effective internal control over financial reporting." The auditors said they were quitting because information had come to their attention that "may materially impact the reliability of either its previously issued audit report or the underlying consolidated financial statements." Deloitte said further investigation would be needed "before the Company and Deloitte can reach any conclusions as to the reliability" of its financial reports for 2009."

At the time, the news of Deloitte's departure — coupled with a lengthy and still un-checked decline in same-store sales and general shitty performance — meant American Apparel's stock price plumbed new depths. (Shares eventually hit bottom at 66 cents.) Though the stock has since rebounded to around $1.66, there was still the matter of Deloitte's promised further investigation into the 2009 results. And now the other shoe is dropping.

According to its latest Securities and Exchange Commission filing, American Apparel received notice from Deloitte on December 15 that the auditors had finished their investigation into the 2009 numbers, and concluded that all of American Apparel's previously issued financial reports for the year "should not be relied upon."

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.

As Going Concern explains:

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.

American Apparel says it is investigating "the assertions that management withheld the February 2010 monthly financial statements" and characterizes Deloitte's allegations as "misrepresentations." And furthermore, American Apparel says it believes that its financial statements for 2009 are basically accurate, and that the re-audit will not "result in any changes" to its results — though, naturally, "no assurance can be given in this regard."

Deloitte doesn't buy that first part, and wrote to the SEC separately to dispute American Apparel's version of events. Sounds awfully like Deloitte is seeking to distance itself from any potential scandal.

After high-profile legal tussles with Woody Allen, almost countless sexual harassment settlements, that incident where founder Dov Charney masturbated in front of a reporter, that incident where founder Dov Charney told the Wall Street Journal that his then-C.F.O. was "an asshole," that time when we found out that the whole company is basically run like a cokier version of the popular kids' table in high school, after all that and so much more, it would be kind of funny if what actually took down American Apparel was something as dry as accounting irregularities. Though, obviously, for a publicly traded company, accurate reporting of financial results is a much more fundamental issue than whether or not the founder is engaging in such colossal wastes of time as sending out emails about the relative thickness of his retail drones' eyebrows.

BNET's Jim Edwards is not alone in arguing the SEC ought to take note:

It's time this troubled fashion advertiser was moved to the top of the feds' to-do list with a thorough investigation...The company was already the subject of an "inquiry" by the SEC and and a subpoena from the Department of Justice, but no details have been given. It would be nice if employees and investors got some visibility on what authorities believe is wrong.

Interestingly, the first — and at time of writing, only — comment on Edwards' piece is from someone who purports to be our favorite person, American Apparel spokeslawyer Peter Schey. He took the time to write his comment out very carefully, so there would be no pesky spelling mistakes!

Here's some visibility: No government agency that we know of at this time thinks anyone did anything wrong. The SEC subpoena issued to American Apparel specifically says this. Even before Deloitte withdrew its 2009 audit the company retained its existing auditors to re-audit 2009. The company does not believe that there will be any changes to the 2009 financials as a result of the re-audit. American Apparel has fully cooperated with Deloitte. Deloitte was provided January-March financials in April. It took them about eight months to determine that the fact they did not receive February financials before their 2009 audit was completed in March, their 2009 audit should be withdrawn. The company will investigate these issues further but at this time has no reason to believe that anyone employed by the company has acted other than with integrity and the highest ethical standards throughout this process.

We have no way of knowing whether or not that's the real Peter Schey — at least until Schey responds to our e-mail asking him about it — but we suspect it is the one and only Schey, if only for the fact that he recycled his favorite burn to close:

At bottom, if Jim knew as much as he claims to know, he would be running a multi-million dollar company with thousands of employees, not writing a blog filled with inaccuracies.

Dov Charney, it is true, runs a multi-million-dollar company. But for how long?

American Apparel Takes Issue With Deloitte's Notion That Management Withheld Some Fairly Important Financial Statements [Going Concern]
Deloitte Fingers American Apparel To The SEC: Time For An Outside Investigation [BNET]
American Apparel Form 8-K, December 15, 2010 [SEC]
Deloitte & Touche's Letter To The SEC, December 21, 2010 [SEC]

Earlier:
American Apparel's Bankruptcy Is Inevitable
Crap E-mail From An American Apparel Lawyer
Working At American Apparel Is All It's Coked Up To Be
American Apparel CEO: Brooke Shields' Eyebrows A Definite "Yes"