Mon, Aug 25, 2003 page12

• KPMG faulted for Polaroid audit

  FINANCIAL WOES A court-appointed investigator has concluded that the auditors did not adequately follow reasonable procedures to verify Polaroid's financial status

  • BLOOMBERG
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  KPMG LLP, Polaroid Corp's auditor, downplayed the company's financial woes in regulatory filings before the instant-photography company sought bankruptcy protection in 2001, a court-appointed examiner concluded.

  KPMG failed to force Polaroid officials to write off assets and include language questioning whether the company was still viable in filings with the US Securities and Exchange Commission, Perry Mandarino of the New York advisory firm Traxi LLC said in a 91-page report.

  A bankruptcy judge in Delaware appointed Mandarino to examine KPMG's handling of Polaroid's books after shareholders and creditors alleged company officials engaged in a "wide array" of accounting irregularities, mis-management and wrongdoing. The New York Times and the Boston Globe first reported Mandarino's conclusions.

  "The investigation uncovered evidence that Polaroid's financial condition at and after Dec. 31, 2000, through July 31, 2001, actually may have been more negative than is reflected in its public filings with the SEC," Mandarino noted.

  KPMG officials weren't immediately available for comment today. KPMG Spokesman Tim Connolly told The New York Times "KPMG remains confident that it acted appropriately at all times and stands by its actions in this matter."

  Mandarino's report was issued Friday after US Bankruptcy Judge Peter Walsh in Wilmington rebuffed KPMG's bid to have the documents sealed. Polaroid sought Chapter 11 protection in Wilmington in October 2001.

  The examiner rejected shareholders' and creditors' contentions that Polaroid officials improperly filed for bankruptcy protection and then undervalued the company's assets to facilitate their sale.

  In July of last year, Bank One Corp's venture capital group, One Equity Partners, purchased most of Polaroid's assets for US$255 million. The assets were placed in a newly formed company that operates under the Polaroid name and is 65 percent owned by One Equity Partners and 35 percent owned by Primary PDC.

  Mandarino questioned whether KPMG auditors properly reflected Polaroid's deteriorating financial situation in the months leading to its Chapter 11 filing.

  The auditors' missteps included failing to force Polaroid officials by late 2000 to write off an asset that would have given the company tax benefits for past losses if the asset became profitable in the future, the report said.

  KPMG officials knew as early as 1999 the company was unlikely to return to profitability given its continuing financial problems.

  Polaroid filed for bankruptcy protection after competition from digital cameras and other technological advances caused sales of instant film to plummet. The company was left with mounting debt.

  KPMG auditors also erroneously relied on assurances from Dresdner Kleinwort Wasserstein, Polaroid's investment bankers, that the company had a "90 percent" likelihood of refinancing its debt and staying in business when KPMG decided not to issue a so-called "going concern" warning in regulatory filings, Mandarino said in the report.

  Such warnings are designed to alert investors that auditors are questioning whether a company is viable or may need to be reorganized in bankruptcy court.

  "The examiner found that KPMG's reliance on DKW was unsubstantiated, as KPMG did not have tangible documentation to support Polaroid's ability to consummate the refinancing," Mandarino said.

  "KPMG should have performed additional procedures to satisfy themselves with regard to the 90 percent assessment by DKW, such as, requesting term sheets, reviewing drafts of the proposed loan documentation and interviewing prospective lenders," the examiner added.

  Dresdner, Kleinwort Wasserstein is a unit of Allianz AG, Europe's top insurer. Allianz acquired the investment bank as part of its purchase of Dresdner Bank AG, Germany's fourth-largest lender, two years ago. Since the acquisition, DKW has lost money, market share and several senior bankers.
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