SAN JUAN CAPISTRANO — An accounting firm that resigned during an audit of struggling discount software company Wiz Technology apparently had strong reservations about the financial information it was getting from the company.
Grant Thornton LLP, which resigned last week, said it was concerned because Wiz Technology had overstated its projected fiscal 1996 financial performance in public statements that it later had to correct. The auditing firm also said it believed the company's management did not adequately oversee its financial practices and policies.
The accounting firm's comments were included in a report that Wiz Technology filed Tuesday with the Securities and Exchange Commission.
Officials at Grant Thorton's Irvine office could not be reached for further comment on their decision to quit less than three months after replacing the previous outside auditor. But the accounting firm's abrupt departure signals serious concerns about Wiz, say accounting and technology industry observers.
Wiz, which makes business, educational and entertainment software often sold in supermarkets and other retail outlets, has gone through three accounting firms in 17 months. The company also told the SEC that Grant Thornton said the company had displayed a "lack of understanding" of certain significant details critical to preparing the company's financial statements and was unprepared for a critical annual audit meeting.
In October, just after hiring Grant Thornton, Wiz officials issued a press release about anticipated 1996 fiscal year profits. A month later the company announced that it actually expected to lose about $2.5 million for the year ended July 31.
The San Juan Capistrano company's audited annual report for fiscal 1996 still has not been issued. But on Tuesday, Wiz reported in an unaudited statement that it lost $248,000 in the first three months of its 1997 fiscal year and that revenue for the period ended Oct. 31 plunged almost 36% to $1.32 million from $2.05 million a year earlier.
Wiz on Tuesday hired Cacciamatta Accountancy Corp., an independent Irvine accounting firm, to take over as its auditor.
"It is not a good thing, that they have gone through so many auditors so quickly," said Dominic R. Marshall, an industry analyst with Portland, Ore.-based Red Chip Review. He said Red Chip, an independent stock analysis company specializing in small companies like Wiz, has lost its confidence in Wiz management. "They have made a lot of statements and forecasts that just haven't come to fruition," Marshall said.
Neither Wiz Chairman Mar-Jeanne Tendler nor the company's new chief financial officer, Richard Nance, responded to requests for comment.
But accountant Danilo Cacciamatta, president of the company's new outside audit firm, said he has spoken with his predecessor and been told that the integrity of the software company's management was not an issue in Grant Thornton's resignation.
Analyst Marshall said he believes that Nance, hired earlier this year, is intent on putting Wiz's financial house in order "but inherited a mess, and it is taking time" to fix things. The analyst said he also is concerned that Wiz has never added outside members to its board of directors. The company's three founders, who jointly own controlling interest in Wiz, are the only members of the board, he said.
An accounting firm's decision to resign in the midst of an annual audit "is a warning signal" to investors, said the managing partner of an accounting firm's Orange County office. "There is an ethical duty to do the job unless the client just isn't meeting its end of the bargain," said the accountant, who asked not to be named.
"If you determine that you can not rely on the management that is in control of the company, then it is difficult, if not impossible, to be comfortable with the financial statements," he added.
Cacciamatta, a former partner with a major international accounting firm, said he believes that accountant-client problems sometimes crop up because large firms often are not temperamentally suited to work with small entrepreneurial companies whose officers often are not financially sophisticated. He said his firm has been hired to prepare the annual audited financial statement for Wiz.
That financial report already is more than a month overdue. Trading in Wiz shares on the American Stock Exchange was halted Nov. 11 when the company said it would not meet the filing deadline for its annual report.
The company's stock last traded at $2.50 a share. It was trading at $5.44 a share on Aug. 21, when Grant Thornton's predecessor, the accounting firm of Coopers & Lybrand, resigned.
Wiz officials said at that time that Coopers & Lybrand gave no reason for quitting. Just 14 months earlier, though, the company's original auditor, Corbin & Wertz, resigned, citing differences of opinion with Wiz management over various accounting practices.
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Wiz Technology, a San Juan Capistrano software marketing firm, has hired its fourth independent auditor since July 1995. Wiz has missed financial filing deadlines, and its stock has not traded since Nov. 11. Key events:
* July, 1995: Corbin & Wertz resigns in dispute over accounting issues; is replaced by Coopers & Lybrand
* August: Coopers & Lybrand resigns abruptly without explanation; Wiz Technology shares fall 22%
* September: Grant Thornton LLP hired as replacement accountants
* December: Grant Thornton resigns and Cacciamatta Accountancy Corp. of Irvine is hired as auditor.
Source: Times reports