TROY, MICH. Shareholders group sues auditor of Kmart over financial collapse

More class-action lawsuits are expected to be filed against the accounting industry.
KNIGHT RIDDER NEWSPAPERS
A disgruntled shareholders group is suing Kmart Corp.'s auditor, accusing it of looking the other way as the century-old retailer careened toward financial collapse.
In its claim, filed Nov. 1 in federal court in Detroit, the group says PricewaterhouseCoopers received millions of dollars in consulting fees from Kmart and had a long-standing relationship with the Troy, Mich.-based discount retailer.
As a result, the suit says, PricewaterhouseCoopers either should have known Kmart was sliding into insolvency or chose to "recklessly disregard" the facts about Kmart's finances.
PricewaterhouseCoopers says the suit is groundless and has asked U.S. District Judge Gerald Rosen to toss it out of court. The firm says that it can be held responsible only for its opinions on Kmart's 2000 and 2001 financial statements and that the suit fails to allege that those opinions were false or misleading.
A spokesman for Kmart said it would be inappropriate to comment.
The suit seeks to be declared a class action. It identifies the shareholder as D.E. & amp;J Limited Partnership and also names several former Kmart executives.
Allegations
Troy lawyer Powell Miller, who filed the case, says PricewaterhouseCoopers did not do its job as a watchdog. "Investors rely on auditors to make sure the financial statements are reliable so people can have confidence in those statements when they make an investment," Miller said. "It was crucial for them to raise the red flag, so the problems would have come to light so much sooner."
Miller's suit is believed to be the first to try to pin some of the blame for the Kmart debacle, which wiped out more than $3 billion in equity and cost 22,000 employees their jobs, on its auditor.
Joe Whall, a forensic accountant in Auburn Hills, Mich., says he expects many similar lawsuits to be filed by shareholders against the accounting industry in the wake of this year's corporate scandals. Questionable and fraudulent accounting practices are blamed for hiding problems at many of the troubled companies.
The case against PricewaterhouseCoopers raises the same questions about Kmart's auditor that members of Congress are asking about its board: What did its members know about its failing financial health and when did they know it?
Signs of collapse
The suit alleges that the signs of a collapse should have been clear to those who were paid to watch out for Kmart's investors:
The company couldn't account for its inventory and had trailers behind its stores stuffed with merchandise that it couldn't sell.
Kmart set aggressive, unrealistic sales forecasts and overstated by $554 million the payments it expected to receive from vendors for stocking their goods in the first three quarters of 2001.
Kmart's relationship with vendors deteriorated as the company charged them for such things as damaged pallets or late shipments, even when Kmart caused the late deliveries.