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Tuesday, November 18, 2003 - Page updated at 12:00 A.M.
Shurgard stock dives after auditor quits over company's accounting
By Alwyn Scott
Call it the fear factor. Shurgard took a stock-market beating yesterday after its auditor, in a highly unusual move, quit abruptly last week, saying it couldn't trust management statements about its accounting.
Shares of the Seattle self-storage company fell 7.1 percent after Shurgard disclosed that Deloitte and Touche quit upon learning Shurgard overpaid its chief executive and another investor $700,000 each and took more than six months to find and correct the error.
Deloitte told the company "it could no longer rely on representations of the company's management," Shurgard said in a statement released Sunday.
Smith Barney yesterday urged investors to sell the stock, after recently rating it "buy," and the shares tumbled $2.75 to $36.10. The broker's downgrade was striking because Citigroup, Smith Barney's parent, had raised $186.9 million for Shurgard by selling 5.75 million new shares as recently as July.
"We struggle to see how this news can be considered anything but 'bad,' regardless of management's explanation," Jonathan Litt, an analyst at Smith Barney, wrote. "We are disappointed that (Shurgard) has not been able to keep its financial house in better order."
Shurgard said the overpayment occurred when the company bought out a limited partnership owned by Chief Executive Charles Barbo and another investor. A person in Shurgard's accounting department used the wrong spreadsheet to figure out what the two were due, spokesman Jeff Szorik said.
The payments were made in April and disclosed in May and August. But it wasn't until Oct. 24, the day Shurgard's board approved buying another of Barbo's partnerships, that Barbo and the company's Chief Financial Officer, Harrell Beck, realized there was a discrepancy in the payments, Szorik said.
Two weeks later, after verifying the error, the company told its board's audit committee and outside auditors of the overpayment. Barbo, who was on vacation in Hawaii, paid back the amount of the overpayment five days later. The other investor, which the company did not name, is expected to repay shortly, Szorik said.
Szorik stressed that the amount of money was immaterial to a company with $260 million in revenue, and that it wasn't necessary to bring such a small amount to the board's attention sooner, though the overpayment to Barbo of $700,000 was more than double his $300,000 salary.
Shurgard has had accounting issues before. It has restated its accounts every year since 1999.
Last spring, Shurgard tussled with Deloitte over accounting treatment for an interest-rate swap.
Deloitte decided to drop a client it had handled since Shurgard's inception, and from which it received more than $1 million in fees last year. Such moves are rare and may pose a problem in attracting a new accountant.
"It's going to be a question of what firms can overcome the prior firm having a lack of confidence in management," said Neal West, director of the accounting and auditing practice at Moss Adams in Seattle.
New firms are required to ask prior auditors about integrity and disagreements with management.
"My feeling is whenever a Big Four auditor backs away from a company, that's not very good news," said Darren Gray, a stockbroker at Smith Barney, who was calling clients yesterday.
"In this climate, it's not a good idea to put your money with companies that can't comply."
Alwyn Scott 206-464-3329 or firstname.lastname@example.org
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