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The AAO Weblog covers accounting issues and current events as they relate the practice of investment analysis. All posts prior to September, 2007 are in the public domain, but after September 4, 2007, only subscribers to The Analyst's Accounting Observer will see all posts going forward. Only selected, occasional posts will be released to the public domain from September 4 forward.

Foamex's Flubs

Location: Blogs AAO Weblog (Public)
Posted by: Jack Ciesielski	7/20/2005 6:34 AM
Cease and desist! Again! Yesterday's posting mentioned the cease-and-desist order given to Comerica. Today's cease-and-desist: Foamex International, a much smaller fish in the sea. (Found in the depths of micro-capdom, in fact.) The firm manufactures - you guessed it - foam used in the manufacture of seating. One note of historical interest: for years it was headed by one Marshall Cogan, a former partner of Sandy Weill and Arthur Levitt in the days when they headed their own Wall Street firm: Cogan, Berlind, Weill & Levitt. On July 11, the SEC slapped Foamex with a cease-and-desist order due to sloppy internal controls. This is not the case of some overarching Sarbanes-Oxley witch hunt, as you may have been conditioned to expect by now. No, this goes back to bad behavior existing before the Sarbanes-Oxley Act was even dreamed of. What happened? Foamex violated the reporting, record-keeping and internal financial control provisions of federal securities laws. The SEC accepted Foamex's settlement offer, wherein they consented to the Commission's findings without admitting or denying them. What did the SEC find? From at least 1999 through 2003, Foamex's auditors (mostly Deloitte) advised the firm of its significant internal control deficiencies, which could prevent it from presenting reliable financial statements. Deficiencies were found by the auditors in the areas of: - information technology systems; - inventory procedures, processes and systems; and - preparation of quarterly financial reports. Evidence that its systems weren't up to snuff: between 1999 and 2003, Foamex restated many of its interim financial reports because of material errors resulting, to some degree, from its its internal control issues. One example mentioned: Foamex had to restate financials for the first three quarters of 2003 due to an inventory overstatement. Foamex's new management has attacked the problems, but the continuous warnings from the auditors showed that the company took its time in getting the problems under control. As part of the settlement, Foamex must "cease and desist" from its past behavior - and it also must adopt any "rehab" procedures specified by an internal control special consultant that it must hire. At $1.3 billion in 2004 revenues and $646 million in total assets at year end 2004, Foamex falls into the category of "small issuer affected by Sarbanes-Oxley costs." It also illustrates why small issuers ought to be spending more on the kinds of controls addressed by Section 404. It would be ironic if the firms with the weakest internal controls are the ones that get the most relief from any revisions of Section 404.

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