With Children’s Place in Turmoil, Deloitte Quits as Auditor

The retailer discloses material weaknesses in its internal controls relating to option grants and executive business conduct policies.
Stephen TaubOctober 11, 2007

The Children’s Place Retail Stores is looking for a new auditor after Deloitte & Touche said it will not handle the company’s February 2, 2008 fiscal year.

The move comes as Chldren’s Place is preparing a restatement of previously issued financial statements. However, the company said in a press release, “Deloitte & Touche’s decision not to stand for re-election does not reflect any disagreement between it and the company regarding any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure.”

The company said it is in discussions with a nationally recognized accounting firm, which it expects to engage shortly as its auditor. It noted that it is working to complete its overdue annual report for the most recent fiscal year, including its audited financial statements, and other overdue quarterly reports as soon as practicable.

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The company had announced in late September that CEO Ezra Dabah resigned after a board committee investigation found that he twice did not comply with internal policies related to securities trades. The probe also found expense-reimbursement irregularities by the company’s chief creative officer; Children’s Place did not identify the individual in its press statement and did not answer a request from to confirm the executive’s identity.

In its latest announcement, the company stressed that Deloitte & Touche stated its intention to quit the engagement before Dabah resigned.

But The Children’s Place also said that “in light of Deloitte’s decision,” two previously disclosed matters will be classified as reflecting material weaknesses in the company’s internal controls over financial reporting. It did not elaborate on why Deloitte’s departure influenced the reclassifications.

For one, the company said an investigation has determined that it did not maintain appropriate governance and other internal controls relating to stock-option grants, which caused incorrect accounting measurement dates to be used for certain grants and related errors in recording compensation expense. Children’s Place said earlier this year that it would restate results by as much as $24 million for fiscal years 2003 through 2005 and the first fiscal quarter of 2006 as a result of these errors.

In addition, regarding the two violations of the company’s Code of Business Conduct by senior managers, the company said it has determined there are deficiencies in the implementation of the company’s policies and procedures, resulting in a material weakness in the company’s control environment.