Auditing

Fairchild Dumps KPMG

The company is not the only mid-cap business in recent days to switch to a tier-two auditor while in the midst of delayed filings.
Marie LeoneSeptember 14, 2007

For the second time this week, a mid-cap company replaced its Big Four auditor with a smaller accounting firm. On Thursday The Fairchild Corp. hired BDO Seidman after ousting KPMG as its independent auditor. Fairchild, which generates $350 million in annual revenues, paid KPMG $3.5 million in fees for the 2006 audit, an 11 percent increase over last year’s payout.

The company, which operates motorcycle-accessory retail shops and an aerospace-parts distribution business, said it has “no disagreements” with KPMG related to accounting or auditing issues that required public disclosure. Fairchild CFO Michael McDonald could not immediately be reached for comment.

Earlier this week, $222 million industrial instrument maker Cognex fired Ernst & Young and hired Grant Thornton as its new auditor. Although Cognex hinted to CFO.com that a smaller firm would better suit its needs, the company gave no official explanation for the E&Y dismissal, only to say in a regulatory filing that no “accounting principles or practices” were at issue. Cognex did note, however, that it was delaying its second-quarter financial reports because an internal review revealed irregularities in its Japanese unit.

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Similarly, Fairchild has delayed filing its last three quarterly reports, going back to the first quarter ended December 31, 2006. Officials expect to file all three reports by mid-October. The company was also late in filing its 2006 annual report, issuing the Form 10-K on August 13.

In addition, as of September 30, 2006, the company identified — and was cited by KPMG for having — material weaknesses related to internal controls over financial reporting. The efficiencies affect financial statements dating back to 2004. Mentioned most often in the internal and audit reports was Fairchild’s lack of resources for monitoring accounting and tax policies and procedures.

The company has also suffered through relatively high CFO turnover during the past few years. In October 2005, John Flynn resigned as chief financial officer and was replaced by James Fox. Flynn remained with the company as senior vice president of tax. Then in July 2006, Fox was terminated, and Fairchild promoted McDonald to the post of CFO. At the time of the appointment, McDonald was a vice president, and had previously served as Fairchild’s controller from 2000 to 2002.

Amid the CFO churn, Fairchild was forced to restate annual and quarterly results reaching back to 2004. The restatements were triggered by errors tied to tax accounting and recording contingencies and long-term investments. The overall adjustments resulted in an increase in retained earnings of $2.7 million through June 30, 2006.

Last week Fairchild named a new controller, promoting Richard Nyren, who had been the company’s assistant controller since October 2006. Prior to joining Fairchild, Nyren was assistant controller at Cybertrust and a senior analyst at the Center for Financial Research & Analysis.

Fairchild is run by Jeffrey Steiner, a controversial former Wall Street executive who has been criticized for his large pay packages and lavish spending, and who often makes headlines for throwing celebrity parties. In 1985 he became chairman and CEO of Banner Industries, which acquired Fairchild Industries in 1989 and changed its name to The Fairchild Corp. in 1990.