Management Accounting

Delphi Sued over Inventory Deals

Lawsuit also names as defendants three companies that "entered into sham transactions intended to falsely inflate Delphi's reported financial resul...
Dave CookOctober 5, 2005

Four pension funds have filed a class-action lawsuit against Delphi Corp., alleging in part that the company improperly treated financing transactions as sales, causing it to overstate revenue and earnings.

In addition to the Troy, Michigan-based auto-parts supplier, the lawsuit named as defendants three companies that “entered into sham transactions intended to falsely inflate Delphi’s reported financial results,” according to the web site of plaintiffs’ lead counsel Bernstein Litowitz Berger and Grossman. The law firm identified those companies as Setech; BBK Ltd.; and Bank One Automotive Group, which was acquired by J.P. Morgan Chase & Co.

The suit also named former chairman and chief executive officer J.T. Battenberg III, former vice chairman and chief financial officer Alan Dawes, former chief accounting officer and controller Paul Free, and other current and former executives; nine investment banks; and Delphi’s auditor, Deloitte and Touche. The company’s former parent, General Motors, was not named.

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Bernstein Litowitz’s complaint alleged that Setech, BBK, and Bank One participated with Delphi “in a series of multimillion-dollar transactions that were designed to allow Delphi to record on its books sales of inventory and/or indirect materials. The money received from these purported dispositions,” continued the complaint “was recorded as income from operating activities, which inflated Delphi’s net income during the time period, while the removal of these indirect materials and inventory from Delphi’s balance sheet created the perception that the company was efficiently and effectively managing excess assets and inventories.”

In fact, “these transactions were nothing more than disguised loans to Delphi,” added the complaint, since the company was selling “unneeded, obsolete, or excess indirect materials” or inventory, “with an agreement that Delphi would repurchase these inventories or materials at a later date.”

And indeed, noted the complaint, in June Delphi filed a restatement for 2001, 2002, and 2003. The restatement reduced 2001 retained earnings by $265 million, to slightly more than $1 billion; lowered 2002 earnings by $24 million, to 318 million; and increased its 2003 net loss by $46 million, to $10 million.

According to a Delphi statement at the time, the restatements resulted from incorrect accounting for a number of transactions, including rebates, credits, and other lump sum payments from suppliers; disposition of indirect material and other inventories; warranty settlements with General Motors, Delphi’s former parent, and other unspecified transactions.

As a result of these accounting errors, Delphi is being investigated by the Securities and Exchange Commission and the Department of Justice. The company reiterated in a regulatory filing that it is cooperating fully; Delphi also agreed to waive the one-year statute of limitations for the SEC investigation until April 6, 2006.

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