Auditors must pay attention to what Wall Street thinks is important about a company's performance and consider those figures no matter how small they are, the US Securities and Exchange Commission (SEC) said Wednes-day, when it reached a settlement with KPMG over its audits of Gemstar-TV Guide International.
Under the settlement, KPMG agreed to pay US$10 million to shareholders of the company, whose share price has plunged since it restated financial results in 2002. The commission also barred four KPMG accountants, two of whom are still with the firm, from auditing public companies.
"The standard is what is important to investors," said Kelley Bowers, an assistant regional director of enforcement in the Los Angeles office of the SEC. "A growing part of the business can be important to investors even though it is a small part of the business."
Audit firms have long taken the position that they did not need to challenge errors in company accounts if the amounts involved were "immaterial," often defined as being perhaps 5 or 10 percent of a company's revenues or profits. For several years, the SEC has tried to make clear in enforcement actions that such a criterion is not enough, when a miss of even a penny a share in expected quarterly earnings can cause a company's share price to plunge.
From 1999 through 2002, Gemstar-TV Guide was promoting to analysts the prospects of its interactive program guide, which customers could navigate through and select television programs. Because the guide provided a small part of the company's total business, the SEC said, the auditors considered the amounts of some questionable transactions involving it to be immaterial, including transactions where advertisers in the print edition were given an equal amount of free advertising in the interactive guide. The revenues were then attributed to the interactive division, helping it to show rapid growth.
The four auditors barred by the SEC were Brian Palbaum, 41, of Encino, California; John Wong, 43, of Huntington Beach, California; Kenneth Janeski, 55, of Tarzana, California; and David Hori, 35, of Scottsdale, Arizona.
Palbaum and Wong are former partners of the firm, while Janeski remains a partner and Hori is a senior manager.
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