by Jeffrey McCracken
Detroit Free Press Business Writer

PLYMOUTH, MI — Auto supplier Metaldyne Corp. has launched an internal investigation into questionable accounting practices for the last seven years that could have resulted in overstating the company’s earnings by $20 million.

The error was followed by a cover-up to balance the books, the company said.

The investigation has caused Metaldyne to fire a division controller and delay the filing of its 2003 annual report, which was due Monday. Metaldyne held a teleconference Monday to announce the investigation and said it had alerted the Securities and Exchange Commission about the accounting irregularities.

While the SEC declined to comment on the matter, a corporate-law expert and former SEC enforcement attorney said the SEC could soon launch its own formal investigation into Metaldyne.

Plymouth, Mich.-based Metaldyne said the controller last week admitted understating income by $10 million at a St. Marys, Pa., plant from 2000 to 2003. Metaldyne said it also has found accounting errors at its plants in Ridgway, Pa., and North Vernon, Ind.

Metaldyne said the controller was trying to compensate for overstating income by $20 million between 1996 and 1999. That was before the plant was bought in the formation of Metaldyne.

The investigation began late last year when a new controller at the St. Mary’s plant discovered documents were missing and accounting discrepancies he could not explain, two people familiar with the situation said. The controller showed his findings to his boss — the previous St. Mary’s plant controller and new controller of a Metaldyne engine parts division. The new plant controller then went to Metaldyne’s top corporate officer, who launched the investigation.

Wednesday, the former plant controller acknowledged the improper accounting and was fired soon afterward. A person familiar with the situation said the controller had been improperly categorizing everyday expenses as investments, which makes a company’s earnings look better in the short term.

Metaldyne, which makes engine and steering parts and other metal components for the auto industry, does not have publicly traded stock, but does have $400 million in publicly traded bonds. These are typically owned by mutual funds, pension funds and other large investors.

The accounting irregularities began before Metaldyne existed. The company was created from three separate and unrelated suppliers: MascoTech Inc., Simpson Industries Inc. and Global Metal Technology Inc. The investigation centers on what was then MascoTech, which did have publicly traded stock.

Metaldyne is owned by Heartland Industrial Partners LP, a private-equity firm that specializes in buying industrial companies it feels are undervalued. Heartland was founded by former Michigan congressman and Reagan administration budget director David Stockman.

Heartland is also majority owner of Collins & Aikman Corp., a Troy-based auto supplier that last year had to conduct an internal investigation into its corporate governance because of concerns about its dealings with members of its board. Collins & Aikman has lost money in five of the last six years and continually cut jobs in an effort to become profitable.

Collins & Aikman’s audit firm, KPMG,declined to sign off on the supplier’s finances for several months while an outside law firm investigated various deals with C&A board members. KPMG finally signed off on C&A’s 2003 finances earlier this month. Stockman is C&A’s chairman and CEO.

Metaldyne President and CEO Tim Leuliette, who is also a partner at Heartland, said the issues at the two Heartland-owned firms are unrelated. Leuliette is also on the board of directors at Collins & Aikman.

“These are two totally different companies,” said a Metaldyne spokesman reading a statement from Leuliette. “At Metaldyne, we’ve got a problem that didn’t begin on our watch. We are getting our arms around this problem and we will fix it.”

KPMG is also the audit firm for Metaldyne, which had 2002 annual sales of $1.7 billion. Metaldyne employs 8,000 worldwide. KPMG will be unable to complete its audit of Metaldyne until the investigation is resolved.

Metaldyne’s old accounting firm, PricewaterhouseCoopers, will also assist the investigation. Metaldyne has also hired another accounting firm, Deloitte, and the Sidley Austin Brown & Wood LLP law firm to investigate.

Peter Henning, Wayne State University corporat elaw professor and former attorney with the SEC and U.S. Department of Justice, said the SEC will probably decide to investigate Metaldyne itself.

“I think there will be a formal SEC investigation, and Metaldyne will have no choice but to cooperate. Accounting violations are now a much higher priority for the SEC and with Sarbanes-Oxley they’ve got money for enforcement,” said Henning.

The Sarbanes-Oxley legislation requires corporations to provide more detailed financial reports.

Copyright 2004 Detroit Free Press. All Rights Reserved.

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