Risk Management

Electro Scientific’s Ex-Controller Pleads Guilty

James Lorenz admits to a scheme for inflating the Oregon tech-equipment firm's profits.
Stephen TaubAugust 8, 2007

James E. Lorenz, former corporate controller of Electro Scientific Industries Inc., pled guilty to federal charges that he lied to auditors in connection with a scheme to falsely increase the company’s profits.

He faces a maximum penalty of 20 years in prison and a $5 million fine. Sentencing is scheduled for Oct. 15.

Lorenz, who was charged in a 17-count indictment in September 2004, pled guilty to one count of making false statements to a public company’s accountants in connection with his role in the scheme.

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He admitted to lying to auditors of the Portland, Ore.-based technology equipment manufacturer by telling them that he had made no changes in company accounting practices in the second quarter of fiscal 2003, when in fact Lorenz had made significant modifications in how the company treated consignment inventory on its books.

“The integrity of our markets depends upon corporate officers providing truthful and accurate information to accountants, auditors and to the investing public,” said U.S. District Court Chief Judge Ancer L. Haggerty. “When they fail to do so, we will prosecute them.”

Former Electro Scientific CEO James T. Dooley also was named in the indictment, and on June 25 he pled guilty to lying to auditors about a separate accounting transaction.

According to Judge Haggerty, on Dec. 10, 2002, Lorenz lied on a quarterly review questionnaire that KPMG had asked him to complete and sign. While he answered otherwise, “Lorenz knew that he had recently changed the way in which consignment inventory was valued on the books of ESI in the second quarter,” according to a press release announcing his plea.

Before the second quarter of fiscal 2003, consignment inventory was not recorded as an asset, the release said. But in the second quarter of 2003, Lorenz changed Electro Scientific’s accounting practice to treat the inventory as an asset. The change, which was concealed from the auditors, falsely increased quarterly net income by $650,564, the judge said.

Lorenz was fired in the spring of 2003, shortly before the company learned there was fraudulent accounting related to the inventory treatment. That August the company restated its financial reports with the Securities and Exchange Commission to correct the false filing.

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