Litigation

Medifast changes auditors: Was Barry Minkow right when he criticized former auditors?

By Tracy Coenen

Last week, Medifast Inc. (NYSE:MED) announced that it changed auditing firms. The company previously used Bagell, Josephs, Levine and Company, and they were criticized for the choice of auditors by Fraud Discovery Institute and Sam Antar. FDI’s criticism was summed up in a press release:

Expert?s letter sites possible stock-touting of Medifast (NYSE:MED) stock by company?s single-officed, New Jersey based, outside auditors through their alleged independent investment entity. Expert also notes that PCAOB cited Medifast auditors for significant deficiencies in three of six audit engagements reviewed by them, or 50% of audits in their sample.

Antar simply said that if Medifast was serious about the quality of its auditors, then it would find new ones.

I also discussed the issue of the auditors and BJL Wealth Management, a company that apparently has some principals in common with the auditing firm. In this post, I discussed what would constitute a conflict of interest for the auditors and what would not. I did not give an opinion on the situation with Medifast, and Bagell, Josephs, Levine, but that did not stop the Medifast lawyers from lying about what I said in their lawsuit against Barry Minkow, me, and others

The lawyers said that in my blog post, I stated that BJL Wealth Management recommending the purchase of Medifast stock to an FDI operative ?would certainly be a conflict of interest for Medifast and its auditor, Bagell, Josephs, Levine & Company.? I said no such thing.

And now Medifast has announced that they’ve ditched Bagell, Josephs, Levine for McGladrey Pullen because they are more qualified to audit Medifast. Huh.

Here’s how they explain it in their SEC filing:

Since Congress instituted the Sarbanes Oxley provisions for public companies, the number of accounting firms who audit public companies has significantly declined. Due to the consolidation and mergers of Accounting Firms who are qualified to audit public companies, smaller regional accounting firms like Bagell, Josephs, Levine and Company LLP now have merged into larger, more diversified regional firms like Friedman, LLP.  Medifast, Inc. upon being notified of  this merger in late December, just prior to the annual inventory, continued with the surviving accounting firm entity to complete its 2009 Audited Financial Statements.

The Medifast Audit Committee conducted a complete review of the audit, tax and Sarbanes Oxley compliance needs of Medifast, Inc. which has experienced significant growth in revenues, profits and taxes.  The Chairman of the Audit Committee, Mr. Charles Connolly, after significant deliberations and review, has announced that as of April 15, 2010, Medifast Inc. (NYSE-MED) has engaged the firm of McGladrey & Pullen, LLP/RSM McGladrey of Baltimore MD to perform audit and tax services for Medifast, Inc.  The Committee determined that RSM McGladrey has extensive resources and experience with public companies on a national and regional basis to better serve Medifast.  This represents the first time Medifast, Inc. (NYSE-MED) has elected to change auditors since 2004.

So now that Medifast has criticized its own (former) auditors for what could be construed to be inexperience and ineffectiveness with public companies the size of Medifast, do you think they’ll amend their civil complaint in the lawsuit accordingly?

And my friends over at Going Concern raise a good point: Why on earth would any respectable auditing firm get anywhere near the financial statements of a company like Medifast? Probably for the same reason KPMG was willing to accept redheaded stepchild Overstock.com as a client even after Overstock fired two other sets of auditors who suggested that Overstock might want to follow GAAP when preparing financial statements.

Full post as published by The FRAUDfiles Blog on April 20, 2010 (boomark / email).