Analyst Dismisses Letter to Herbalife's Auditor PricewaterhouseCoopers

LOS ANGELESA financial analyst who is bullish on Herbalife Ltd. does not anticipate a letter sent to the company's accounting firm will impact an ongoing audit.

In the Aug. 29 letter to PricewaterhouseCoopers International Ltd. (PwC), William Ackman of the hedge fund Pershing Square Capital Management, L.P. argued PwC could expose itself to "substantial liabilities" if Herbalife was found to be a pyramid scheme, the accounting firm failed to reveal the risk, and the nutritional supplements company went bust.

In a widely publicized presentation in December 2012, Ackman predicted the collapse of Herbalife and is said to have bet $1 billion against the company. Since that time, other investors including billionaire Carl Icahn have taken significant interests in Herbalife, and the stock price has soared year to date, reaching a 52-week high of $74.22 on Sept. 19. 

In the letter to PwC, Ackman also raised concerns over Herbalife's financial statements and questioned the independence of PwC given its non-auditing work performed on behalf of the Herbalife. For instance, Pershing Square Capital Management has claimed Herbalife treats wholesale commissions as an offset to revenue rather than as an operating expense, understating by $300 million recruiting-based incentives the company pays distributors.

Timothy Ramey, a research analyst with D.A. Davidson & Co. who has a "buy" rating on Herbalife shares, has brushed aside the concerns raised in the letter.  

"The letter is an eleven-point discussion of various accounting treatments that Herbalife and its previous auditors have taken. We do not see a single 'smoking gun' or anything that would cause us meaningful concern," wrote Ramey on Sept. 11.

Over the summer, Herbalife retained PwC to audit its financial statements for the fiscal year ending Dec. 31, 2013 and re-audit financial statements for the past three fiscal years (2010, 2011 and 2012). The company explained that the resignation of its previous auditor, KPMG, did not relate to its financial statements or accounting practices; rather, one of KPMG's former partners was suspected of insider trading.

Caroline Nolan, a spokesperson for PwC, on Monday declined to comment on the Herbalife letter from Pershing Square Capital Management.

"The reaudit is progressing as planned," a spokesperson for Herbalife said Monday in an emailed statement. "As we stated publicly on our second quarter earnings call, we expect all prior periods to be issued simultaneously no later than the end of this calendar year. The company stands by its prior financial statements." 

Shares of Herbalife (HLF) closed today at $68.96 on the New York Stock Exchange. On Dec. 24, just a few days after Ackman's presentation, the stock was trading at around $24 per share.

In other recent developments at Herbalife, the company announced on Sept. 5 that it has retained former Los Angeles Mayor Antonio Villaraigosa to serve as a senior advisor to its chairman and CEO, Michael O. Johnson, and the company's board of directors.

"Herbalife has been a solid member of the Los Angeles business community and a strong presence within the Latino community since the company was founded here in 1980," Villaraigosa said in a statement.