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Cloud Over IPG Darkens

Possible New Financial Restatements and Extensive 'Material Weaknesses' Revealed

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NEW YORK ( -- In a regulatory filing and press release, Interpublic Group of Cos. yesterday revealed details on its growing mess of problems: It may restate multiple years of financial reports; 2004 and quarterly 2005 reports will be late; it may postpone the shareholders' meeting; and it is fixing extensive "material weaknesses" in financial controls will extend into 2006.

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Interpublic offered the details after the market closed, following up on its March 11 disclosure that its annual report would be late and that it might need to revise earlier financial statements.

Dark cloud over company
In its disclosure yesterday, Interpublic said it doesn't know when it will file its fourth-quarter and 2004 financial results and 2004 annual report. Uncertainty about Interpublic continues, keeping a dark cloud over the company.

Interpublic said it will offer more details in an investors' conference call April 5.

The agency holding company March 11 disclosed it may need to restate earlier financial reports, mainly because it may have "improperly recognized" revenue and income tied to acquisitions from 1996 to 2001. In that disclosure, Interpublic said it was "in the early stages of its review" but that it had identified $145 million in revenue and $25 million in net income that may have been improperly accounted for when it consolidated results of acquired companies.

Interpublic yesterday offered no new numbers on the size of possible restatements. But it said a restatement "could also affect periods after 2001."

Widespread 'material weaknesses'
Interpublic offered details on widespread "material weaknesses" it found in internal financial controls in an evaluation required under the Sarbanes-Oxley Act.

Interpublic warned: "Each of the company's material weaknesses results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected."

Interpublic said: "Our [financial] control environment does not adequately ensure the following matters consistently across the organization: compliance with our own policies and procedures, including those contained in the Interpublic Group Code of Conduct; adequate financial oversight at various levels within the organization; and an adequate staff of competent accounting personnel with knowledge of GAAP [generally accepted accounting principles]."

SEC interest?
Interpublic's disclosures could draw interest from the Securities and Exchange Commission, which began a formal investigation of the company in January 2003 after Interpublic revealed bookkeeping errors and restated its financial reports for 1997 to 2001.

Interpublic said it still doing a lot of bookkeeping analysis manually. "Heavy reliance on manual procedures persists because systematic processes are not in place to adequately identify and manage significant business risks that may impact financial statements and related disclosures," the company said.

"We have extensive work remaining to remedy the material weaknesses. ... The magnitude of the work is attributable partly to our significantly decentralized structure and the number of our disparate accounting systems of varying quality and sophistication," Interpublic said." We are in the process of further developing a remediation plan to address our deficiencies."

Material weakness points
The company disclosed material weaknesses in:

  • Accounting for intercompany transactions. (This comes more than two years after Interpublic disclosed problems in -- and said it was working on solutions for -- the way it accounted for transactions among Interpublic companies and offices.)

  • Controls "to ensure that client contracts and fee arrangements have appropriate authorization, meet minimum documentation requirements and have been analyzed so that revenue can be recognized in accordance with GAAP."

  • Controls over "the safeguarding of assets, particularly through the segregation of responsibility and authority between initiating, processing and recording of transactions are ineffective, which could lead to the misappropriation of assets."

  • Controls to ensure real-estate costs are properly expensed. (Real estate generally is the No. 2 expense for agencies, after labor.)

  • Controls over the documentation and analysis of acquisitions.

  • Controls for "timely reconciliation" and "analysis and monitoring" of financial statements.

  • Controls "to ensure that the transactions are appropriately initiated, authorized, processed, documented and accurately recorded."

  • Controls over "documentation, control and monitoring of the financial results reporting process to ensure the financial statements are complete and accurate."

Interpublic said its plans to fix financial controls will extend into 2006.

Missed Sarbanes-Oxley deadlines
The company missed Sarbanes-Oxley deadlines for the financial-controls evaluation. But Interpublic said that "should not by itself preclude the company from receiving an unqualified opinion on its financial statements" from its auditor PricewaterhouseCoopers.

Pricewaterhouse has been auditor since 1952, signing off on the books at every step since Interpublic invented the concept of the ad agency holding company.

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