Irregularities imperil Leslie Fay profits

February 02, 1993|By New York Times News Service

The Leslie Fay Cos., one of the largest publicly traded apparel manufacturers in the country, stunned Wall Street yesterday with the announcement that it had discovered accounting irregularities that might erase last year's profits, once its books are corrected.

The company suspended Donald F. Kenia, its corporate controller, and asked its audit committee, made up of outside directors, to review the company's records. It has also retained the law firm of Weil, Gotshal & Manges to handle any shareholder lawsuits that may arise.

"It was as big a surprise to me as to anyone," John J. Pomerantz, chairman of Leslie Fay, said in a telephone interview. "I'm still in a state of shock."

Mr. Pomerantz said that apparently false entries were made in the company's records that might wipe out its 1992 earnings and force a restatement of its 1991 profits. He refused to elaborate on the nature of the false entries.

Mr. Pomerantz said Paul F. Polishan, the company's chief financial officer, had called him in Canada Friday and said, "We got a problem -- maybe a little more than just a problem."

Accountants and analysts with knowledge of the situation said that Mr. Kenia, who started working for Leslie Fay in 1976, told Mr. Polishan Friday that Mr. Kenia and 15 employees in the company's Wilkes- Barre, Pa., offices had been falsifying invoices for a little more than a year. Mr. Kenia said he was coming forward because the discrepancies caused by the falsification had become too large to hide.

It was unclear how, or whether, Mr. Kenia or other employees might have benefited from the falsification. Messages left at Mr. Kenia's office were not answered.

"They don't have a clue right now what the numbers are," said Peter J. Siris, an analyst at UBS Securities Inc. "The people running the company have been making decisions based on numbers that were phony."

Leslie Fay has not dismissed the other employees involved in the Wilkes-Barre accounting because it needs them to help the audit committee sort out the problems, he said.

The company's stock lost more than one-third of its value yesterday, falling $4.625 on the New York Stock Exchange, to close at $7.375. Analysts were dumbfounded by the company's announcement.

"This is really kind of incredible," said Edward Johnson, director of the Johnson Redbook Service, a division of Lynch, Jones & Ryan that monitors retail and apparel stocks.

Some analysts said the company's financial controls were lax and that it was likely to face shareholder lawsuits. "This is the kind of thing that happens only if you're not watching carefully," Mr. Siris said.

Executives in the company who know Mr. Kenia had trouble believing the reports. "He is a straight arrow, a real decent guy," said one, who spoke on condition of anonymity. "Something doesn't add up here."

Another executive wondered how the accounting irregularities had escaped notice by Mr. Polishan, known as a hard and thorough taskmaster who insisted on seeing every financial document that is given to the company's auditors.

Mr. Polishan, who started with Leslie Fay in 1969, rose through the accounting ranks to win the senior financial post when Walter Leiter retired a few years ago.

Leslie Fay listed earnings of $29.4 million for 1991. Before the announcement, analysts had lowered their estimates of 1992 earnings to between $1.32 and $1.55 a share, according to Bloomberg Business News.

The company, which makes women's clothing under the Breckenridge, Leslie Fay, Castleberry and Albert Nipon labels among others, shipped about $10 million less than it had planned during the holiday season, and analysts had forecast that heavy markdowns in the fourth quarter would take a bite out of operating profits.

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