Ex-Auditor of Home Theater Details Woes : Resignation: In response to company denial, former official elaborates on SEC filings, alleging a scheme to overstate profits.
The former auditor of Home Theater Products International Inc., whose resignation was reported earlier this week in federal filings, alleged Friday that he left the company because it was involved in a scheme to overstate profits and revenue.
Accountant Jaak (Jack) Olesk of Beverly Hills alleged that the company created phony accounts receivable through which it was able to report millions of dollars in profits when it actually had millions in losses. He said he uncovered discrepancies through a routine audit and resigned Sept. 5.
“I concluded this was a fraud,” Olesk said in an interview. “It was really pretty clever.”
Company executives were not available for comment Friday, but the chairman has in the past denied Olesk’s allegations.
Olesk said the Anaheim-based consumer electronics maker claimed earnings of $4 million during fiscal 1995, when it actually lost $5 million. Similarly, he estimates that revenue should have been $32 million, rather than the $41 million that was reported.
He said Nasdaq, which trades Home Theater stock, and the Securities and Exchange Commission have been formally notified of his Sept. 5 resignation.
His reasons were contained in an SEC filing this week in which he cited “significant weaknesses” in internal controls and “concerns relating to management integrity” at the company.
He said Friday that he renounced his previous audits to the agencies, but did not elaborate on his reasons for leaving.
A company spokesman said Home Theater Chairman Paul Safroncik was traveling and could not be reached for comment. He earlier denied any wrongdoing on the company’s part and added that he was “caught by surprise” when his auditor of three years made the allegations.
Olesk said in the interview he wanted to elaborate in light of the company’s denials.
The company’s new auditor, Oscar Sendowsky of La Habra, said Friday that he has been on the job only about week, and “I don’t know what the bottom line will be.”
An SEC spokesman could not confirm nor deny whether an investigation would be launched.
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Olesk said the discrepancies came to light when he mailed letters to companies that owed money to Home Theater. Two of the letters were returned as undeliverable. Checking further, Olesk said he could not find telephone listings for either.
He said he brought the findings to the company’s controller, who didn’t seem to care.
“It seems that it should have been an area of great concern,” he said. “They were nonchalant.”
Olesk then said he uncovered 15 suspicious accounts amounting to $5 million. While Home Theater had signed letters from the customers confirming they owed money, Olesk said he could not find telephone numbers for them. He would later find six more, he said, the total as of June 30 to $9.3 million.
Safroncik and Adamo explained that they believed computer error was at fault, he said.
Olesk took a hard look at the largest suspicious account receivable, about $732,900. On a visit, he found that the store was legitimate. But employees told him they did not owe money to Home Theater and that the woman whose named appeared in Home Theater’s records, “Liz Pierce,” did not exist.
The address listed turned out to be Mailboxes Etc. in Oceanside, not the legitimate company.
He said he has since tried to determine how much the company’s books may have been overstated during his time as auditor. He concluded that the company may have overstated its revenue of $7 million as of June, 1992, by as much as $400,000, but that he could not determine any overstatements for 1993 and 1994.
Home Theater closed at $2.09, up 6.25 cents on Nasdaq with a volume of 294,600 shares, before Olesk’s allegations appeared on news wires.
