Accounting

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American Apparel's accounting firm switch is probed

The Los Angeles clothing maker says the U.S. attorney in New York is investigating its replacement of Deloitte &Touche with Marcum.

By Shan Li, Los Angeles Times

August 18, 2010

Troubled Los Angeles clothing company American Apparel disclosed Tuesday that the U.S. attorney's office in New York City is investigating its abrupt change of accounting firms.

Deloitte & Touche resigned as American Apparel's accountant and was replaced by Marcum, the company recently announced.

Peter Schey, an attorney for American Apparel, said the company received a subpoena seeking documents and other records "a few days ago."

The change of accountants "was definitely not anything sinister," Schey said in an interview. "It has nothing to do with them coming across evidence of fraud or anything of that nature."

Investigators at the U.S. attorney's office could not immediately be reached for comment.

American Apparel disclosed July 28 that Deloitte had resigned as the company's accountant. The apparel firm noted that Deloitte had reported previously that the company had weaknesses in its internal financial reporting controls.

The clothing firm also said Deloitte had told it that further investigations might affect the reliability of its previous audit reports and the underlying financial statements for 2009.

Word of the subpoena came as the firm also issued a warning that its second-quarter earnings are expected to show a loss and said that in the coming year there is "substantial doubt that the company will be able to continue as a going concern."

The company did not report earnings Tuesday but said it expected quarterly operating losses of $5 million to $7 million, compared with a profit of $7.3 million a year earlier.

Chief Executive DovCharney declined to comment on the company's financial condition, referring questions to Schey. The attorney said that the retailer was not seeking bankruptcy protection at this time and was looking for ways to improve its position.

"The company has experienced bumps in the road before and has overcome them," he said. "It is looking for ways to overcome bumps in the road now."

Known for its racy advertising and colorful basics, American Apparel has been plagued over the last year by falling sales, plummeting earnings and run-ins with immigration and financial regulatory authorities.

The company also said Tuesday that it might be delisted from the New York Stock Exchange because it will not be able to file its second-quarter earnings report in time following the change in auditors, after having already failed to file its first-quarter earnings before the deadline.

QUESTIONS:

• What might they have done to the books to create a ‘profit' versus a ‘loss'. Apply what you have learned in Ch. 1 and 2.

• How might this situation impact the stockholders, creditors, etc. Be thorough in your comments, provide an example or details.