IPG Grapples With More Accounting Woes

NEW YORK Interpublic Group's acknowledgment Friday that it was facing yet another financial restatement triggered a series of setbacks and distractions for the holding company and its agencies—from Standard & Poor's lowering its long-term credit rating to agency CEOs scrambling to reassure clients. IPG is still reviewing the problem—this time related to acquisitions—and other accounting issues, but said it had already identified about $145 million in revenue and $25 million of net income that "may have been improperly recognized" between 1996 and 2001. The bulk of what appeared to be improperly booked revenue stemmed from hundreds of relatively small acquisitions during that period, sources said. It is believed that the 300 to 400 deals at issue were designed to diversify the offerings of Draft, PR firms such as Weber Shandwick and Octagon and expand the global footprints of McCann WorldGroup, Ammirati Puris Lintas and Lowe. In the wake of the infamous $181.3 million accounting imbalance in 2002, some insiders expressed disbelief. "It's hard to imagine that we're back here," said one. In an internal memo, Roth tried to prepare IPG's 43,000 employees for the fallout: "These developments mean that we will once again be in the spotlight. We'll make headlines. Our stock will come under pressure. In light of this uncertainty, the credit rating agencies will likely downgrade our debt." S&P moved quickly, saying Friday morning that it was downgrading IPG's rating to "BB-" from "BB+" and keeping the company on CreditWatch with negative implications. In a statement, S&P credit analyst Alyse Michaelson Kelly cited IPG's delay in reporting 2004 financials, the possibility of a restatement and the company's intention to seek waivers and amendments to its bank loans. "Standard & Poor's believes that fully dealing with all these issues will take some time," Michaelson Kelly added.Fitch also lowered two of IPG's ratings and placed it on a "rating watch negative."By Friday afternoon, trading volume on IPG's stock had soared past the 11.3 million mark, with the share price hovering around $12. (IPG's average trading volume is around 2.6 million.) It was the fourth straight day of high-volume trading, as investors questioned and then discovered why IPG still hadn't set a date to report financial results for the fourth quarter and all of 2004. Even after the news broke, no date was set, but IPG is expected to provide a timetable on Thursday.Reaction from leading industry analysts was muted, despite that this would be the second major restatement in three years. IPG's 2002 restatement stemmed from multiple offices of McCann Erickson claiming the same revenue. That problem, which was centered in Europe, triggered a Securities & Exchange Commission investigation that continues to this day."Based on our conversation with the company, we do not have reasons to believe that the restatement would have any bearings on IPG's client relationships," said Merrill Lynch's Lauren Rich Fine, in a report. "As such, we do not think the potential historical financial statement restatement will materially change the economic value of the company today. We also point out that IPG has gone through various changes in management since the period of restatement and the accounting issues did not occur on the current team's watch." Sources expect the latest accounting irregularity to become part of the SEC's investigation. There's also the potential for more shareholder lawsuits-ironically just as IPG winds down settlement negotiations related to class-action suits stemming from the 2002 restatement, according to sources.Despite the bad news and uncertain outcome, some agency CEOs rallied around IPG's new CEO Michael Roth, expressing confidence that he would get to the bottom of what sources described as an issue of claiming full-year revenue for agencies acquired mid-year. "Obviously, this is a difficult thing, but I'm more bullish than ever on Interpublic because Michael Roth is the right guy (to get this fixed)," said Deutsch CEO Donny Deutsch. Said another CEO, who declined to be identified, "It's hard for me to get my head around it. But I really think Michael Roth is going to be the leader who gets us through this." Others expressed frustration. "I haven't absorbed it yet. These are all things that involve accounting clean-up. Anything that brings closure to the situation will be good. But it doesn't feel good to live through it."—with Kathleen Sampey and Noreen O'LearyThis story updates an item posted on March 11 with additional information about the nature of IPG's accounting woes.

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IPG Grapples With More Accounting Woes

Andrew McMains

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