Herbalife Statement: It’s All on KPMG

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Shortly after 11 a.m. ET this morning, Herbalife Ltd. (NYSE: HLF) announced the KPMG had resigned effective immediately as the nutritional food maker’s accounting firm. Shares of Herbalife did not open this morning, and an earlier report had indicated that an insider trading allegation at the accounting firm was the reason.

In its statement, Herbalife said:

KPMG advised the Company it resigned as Herbalife’s independent accountant solely due to the impairment of KPMG’s independence resulting from its now former partner’s alleged unlawful activities and not for any reason related to Herbalife’s financial statements, its accounting practices, the integrity of Herbalife’s management or for any other reason.

While Herbalife goes into some detail about the reasons for KPMG’s resignation, the food maker also notes:

[KPMG] had no option but to withdraw its audit reports on Herbalife’s financial statements for the fiscal years ended December 31, 2010, 2011 and 2012 and the effectiveness of internal control over financial reporting as of December 31, 2010, 2011 and 2012 and that such reports should no longer be relied upon as a result of KPMG’s lack of independence created by the circumstances described above.

Herbalife goes on to say that its own audit committee and its board of directors are accurate, but the fact remains that a new accounting firm will need to review KPMG’s work and swear to its accuracy. Such a review opens up Herbalife’s past financial statements and makes them and the new accounting firm a target for William Ackman, who has taken a huge short position in Herbalife and charged the company with being a pyramid scheme.

You can almost hear Ackman’s question now: “Are we supposed to take the word of an accounting firm that employed at least one crook and accept the assurances of the pyramid schemer itself that the financial statements are truthful?” This could still get very ugly for Herbalife and is not what the company’s investors wanted to hear right now.

Shares of Herbalife have not started trading as of about 11:25 a.m. ET.

Herbalife’s statement is available here.

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