Trading Suspended in Anaheim Firm’s Stock : Securities: Home Theater Products seeks the action in the wake of ex-auditor’s charges that profit was overstated.

Trading was indefinitely suspended Monday in shares of Home Theater Products International Inc. in the wake of a former auditor’s allegations that the consumer electronics maker was involved in a scheme to overstate profit and revenue.

Nasdaq officials, whose investigators talked to Beverly Hills accountant Jaak Olesk early Monday, said trading will remain suspended until the company can re-establish its financial viability.

Olesk, who resigned as Home Theater’s auditor Sept. 5, said late last week that he quit after discovering that the company was overstating profit and revenue by creating phony documents showing it was owed money when it wasn’t.

Nasdaq officials said Home Theater Products will have to re-qualify before it can start trading again, a process that can take days or weeks.

“Now what’s in question is whether it’s qualified to be on Nasdaq,” said Lynn Nellious, director of market surveillance. He declined to elaborate on the allegations.

Anaheim-based Home Theater issued a brief statement saying that it voluntarily asked Nasdaq for the trading halt “pending a voluntary investigation to determine the reliability of the company’s financial statements.”

In a letter to the National Assn. of Securities Dealers, company lawyer Harry S. Stahl said that “management is presently conducting an investigation to determine the state of financial affairs.”

Stahl and company executives did not return phone calls.

The 150-employee company makes home entertainment systems, combining video, stereo and other units in cabinetry. It markets them under a licensing agreement with Paramount Pictures. A Paramount spokesman had no comment on Home Theater’s troubles.

The company’s problems surfaced early last week when it announced in a filing with the Securities and Exchange Commission that Olesk had resigned as its auditor of the past three years. Olesk stated in the filing that his resignation was due to “significant weaknesses” in internal controls and “concerns relating to management integrity.”

In response to the filing, the company denied that there were problems with management but said it would take steps to improve internal controls.

Then on Friday, Olesk offered a more powerful explanation, alleging that Home Theater had been involved in a scheme to allow it to report millions in profit when it actually was losing millions.

“I concluded this was a fraud,” Olesk said in an interview. “It was really pretty clever.”

Olesk said the consumer electronics maker claimed earnings of $4 million during fiscal 1995, when it actually lost $5 million. Similarly, he estimated that revenue should have been $32 million rather than the $41 million that was reported.

Olesk said the purported fraud came to light when he mailed letters to companies that owed money to Home Theater, as he does as a routine part of the audit. Two of the letters were returned as undeliverable and he could not find telephone listings for either of them.

He said he brought the findings to the company’s controller, who he said was “nonchalant.”

Olesk said he then uncovered 15 suspicious accounts amounting to $5 million. While Home Theater had letters from the customers confirming they owed money, Olesk said he could not find telephone numbers for any of the companies. He said he later found six more firms, bringing the total dollar figure as of June 30 to $9.3 million.

Company officials, he said, told him that they believed the findings were computer errors. Unswayed by those explanations, 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 that 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.

An analyst who follows Home Theater, Edward C. Larkin of the brokerage Cohig & Associates in Englewood, Colo., said he was impressed by how quickly the company had been growing. He said he nonetheless issued a “sell” recommendation last week when the auditor’s resignation became known.

“I thought it was highly unusual for the auditor to cite integrity as a reason” for quitting, he said.

Home Theater’s stock price Monday was $2.09, unchanged from Friday.

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Home Theater Products International at a Glance

* Headquarters: Anaheim

* Founded: 1992

* Chairman: Paul R. Safronchik

* Employees: 150

* Business: Consumer electronics

* Exchange: Nasdaq

* 52-week high: $7.03

* Friday’s close: $2.09

Source: Bloomberg Business News;

Researched by JANICE L. JONES / Los Angeles Times