From From Detroit Free Press
TROY, MI — Delphi Corp., the world’s largest auto-parts maker, said it has become the target of a Securities and Exchange Commission (SEC) investigation into how the company accounted for $90 million in information-technology contracts, mostly via deals with the computer-services firm Electronic Data Systems Corp.
The investigation of Delphi is the first known SEC probe of a major auto-related company in recent years. The auto industry has largely escaped the kind of accounting fraud and financial-reporting scrutiny that caught up companies like Enron Corp. or WorldCom the last few years.
Delphi was subpoenaed by the SEC in late July and informed of the formal investigation in August, the Troy, Mich.-based parts supplier said in a filing with the SEC Wednesday. The inquiry includes the accounting treatment of $86.5 million in transactions with EDS from 2001 through 2003, including credits to Delphi from EDS and then later payments to EDS from Delphi.
The transactions the SEC is investigating at Delphi include a total of $46 million the auto supplier received from EDS in 2000 and 2001 and then $40.5 million Delphi paid EDS in 2002 and early 2003 for putting in an information-technology system.
The SEC is also looking at $3.5 million that Delphi received from another information technology company, the filing shows. Delphi declined to identify that firm.
The SEC is also investigating other Delphi information-technology contracts and how the auto supplier accounted for them as well. Delphi, which has annual sales of $28.7 billion, makes everything from steering systems to XM satellite radios to in-vehicle DVD players.
A Delphi spokesman said the company is cooperating fully with the SEC.
“We are conducting our own internal review of these transactions with EDS and other information transactions from 2001 to 2003 as well,” said Claudia Baucus. “We don’t know whether any other transactions will be within the scope of the SEC’s investigation. We can’t go into details on this right now.”
Baucus declined to say how Delphi accounted for the $90 million in information-technology contracts and what exactly the SEC’s concern is.
The SEC could not be reached for comment and typically doesn’t discuss its investigations.
Accounting experts speculated Delphi either accounted for the $46 million from EDS as income when it shouldn’t have or conversely didn’t account for the $40.5 million it paid EDS.
“If I were to guess, and that’s all we can do, it looks like Delphi might have been booking income in these deals with EDS, and the SEC is questioning whether it’s really actual income that should have booked. Maybe they recognized the income too soon or shouldn’t have recognized it at all,” said Thomas Bost, a securities law professor for Pepperdine University Law School in California.
“The other possibility is they didn’t expense those payments as they made them,” said Bost.
Delphi and EDS are both former divisions of General Motors Corp. but were spun off by the automaker several years ago.
The Plano, Texas-based EDS said in an August SEC filing it had “a matter” the government wanted to investigate that involved a transaction between it and a third party. An EDS spokesman confirmed that third party is Delphi.
Delphi made public the SEC investigation shortly after the stock market closed. In after-hours trading its shares were off about 5 percent to $8.72 per share.
Some smaller suppliers, such as Troy-based Collins & Aikman Corp. and Plymouth-based Metaldyne Corp., have had to restate their earnings for several periods, but neither has acknowledged being the target of a formal SEC investigation.
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