The Interpublic Group of Cos. Inc. announced that it will restate its financial results for the years 2000 through 2004 after discovering accounting errors as well as evidence of “possible employee misconduct.”
The advertising giant added that the restatement also affects periods prior to 2000, which will be reflected as an adjustment to opening retained earnings as of January 1, 2000. Interpublic did not specify the amounts involved except to say that the impact for all periods will be material.
“As we have disclosed in prior filings, we have material weaknesses relating to our control environment and our accounting for revenue, acquisitions, leases, and other matters,” the company stated in a regulatory filing. In addition to weak controls, Interpublic attributed the errors to its decentralized operational structure.
According to Interpublic, its restatement will address three major accounting issues:
• Accounting for revenue. The company acknowledged that it lacks adequate procedures for reviewing customer contracts. “In addition, we do not have adequate procedures on the treatment of various types of vendor credits, discounts, differences between vendor prices and client cost estimates and duplicate customer payments,” it added.
• Accounting for acquisitions. Interpublic noted that in connection with certain acquisitions through 2001, the company incorrectly consolidated the revenue and expenses of the acquired entities from a date earlier than the effective date of acquisition, resulting in overstatements of revenues, expenses, and earnings in the period of acquisition. In addition, when accounting for some acquisitions, deferred payments or put-option payments were not properly accounted for as compensation expense, the company added.
• Accounting for lease expenses. The company acknowledged that it erroneously recorded rental expense for certain operating leases on a cash basis rather than a straight-line basis.
As for the company’s investigations into possible employee misconduct — which relate primarily to agencies outside the United States — the company stated that they concern “qualitatively material” accounting errors. The errors resulted not only from the misapplication and inadequate knowledge of GAAP, added the company, but also from instances of falsified books and records, violations of laws, regulations and company policies, misappropriation of assets, and inappropriate customer charges and dealings with vendors.
The investigations are nearing completion, stated the company, and the results are being reviewed by the audit committee with the advice of independent counsel and forensic accountants. “Culpable employees have been terminated or are in the process of being terminated or are otherwise no longer with the company,” stated Interpublic.
By September 30, Interpublic intends to file its 2004 annual report — which will include the restated information — and its reports for the first and second quarters of 2005. The company noted it still has “substantial work” to do before it can obtain assurance regarding the reliability of its financial statements. Interpublic added that its auditor, PricewaterhouseCoopers, is still in the process of completing its audit, and that the company expects to receive an unqualified audit opinion for its 2004 annual report.