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General Automation Accuses Ex-Auditor of Negligence

Accounting: Suit by Irvine software services company says Price Waterhouse failed to spot errors for years.


General Automation Inc. sued its former auditor on grounds of negligence, claiming that the firm failed to detect internal accounting errors that resulted in "substantial reporting errors."

The Irvine-based software support services firm filed a complaint in Orange County Superior Court against Price Waterhouse LLP, its auditor from 1991 to 1996. The suit seeks unspecified damages.

"Some decisions we made regarding the company might have been different had we known the true financial condition of the company," said Richard Nance, General Automation's chief financial officer. "These errors weren't found during Price Waterhouse's watch, but were discovered afterward. How did Price Waterhouse miss it year after year after year?"

Price Waterhouse officials were unavailable for comment.

Nance said General Automation reported $4 million in inflated revenue and underreported expenses from 1993 to 1997. During that time, the company acquired assets of two companies, a move it might not have undertaken had it known its true financial state, Nance said.

After "terminating" Price Waterhouse, the company hired McGladrey & Pullen LLP as its accountant. In 1997, McGladrey uncovered some of the internal accounting errors. An internal audit by General Automation uncovered more problems.

Subsequently, both McGladrey and Price Waterhouse withdrew and restated General Automation's annual reports for 1995, 1996, 1997. While McGladrey continues to do the company's taxes, the company chose not to serve as its auditor. Cacciamatta Accountancy Corp. now serves as the company's auditor.

General Automation, whose shares were delisted by the American Stock Exchange last year, appears to have smoothed out the bumpy road. It reported net income of $172,000, equal to 2 cents per share, for the second quarter ended March 31, compared with a loss of $1.7 million, or 19 cents a share, a year earlier. Revenue for the quarter hit $7.6 million, versus $7.8 million in 1998. The company's stock, now traded over the counter, closed at 40 cents Thursday. Last year, its stock hit a low of 15 cents.

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