Risk Management

Ex-Bakery Finance Exec Settles with SEC

Reserve-management case involved unreliable workers' comp estimate.
Stephen TaubDecember 21, 2006

The former finance chief of the maker of Twinkies and Wonder bread has settled civil charges with the Securities and Exchange Commission that he overstated earnings due to the way he accounted for workers’ compensation expenses. The company—Interstate Bakeries—also settled the same charges with the regulator.

Paul Yarick, the former principal financial officer of Interstate, agreed to a civil penalty of $50,000, and to be barred from serving as an officer and director for five years. The company, known for its Wonder, Dolly Madison and Hostess brands, settled the Commission’s cease-and-desist order without admitting or denying the SEC’s findings.

The SEC’s complaint alleges that Yarick disregarded liabilities estimates provided by Interstate’s insurance consultant pertaining to future workers. Historically, the company relied on these estimates to set its workers’ compensation reserve, noted the complaint. Instead, Yarick used obsolete information, despite being advised that it was unreliable, to set Interstate’s quarterly workers’ compensation reserve for the fiscal second and third quarters 2004, the regulator asserted.

The SEC claims that as a result of Yarick’s conduct, Interstate failed to account for its workers’ compensation reserve in accordance with Generally Accepted Accounting Principles. The complaint further alleges that Yarick’s conduct led the company to file financial statements for the fiscal second and third quarters 2004 that understated reserves by at least $30 million. Consequently, Interstate materially overstated both pre-tax income in its quarterly report for the period ended November 15, 2003, and cumulative fiscal third quarter pre-tax income in its quarterly report for the period ended March 6, 2004.