Updated from 1:42 p.m.Pre-Paid Legal Services ( PPD) is having some issues again. For one thing, the company faces new questions about its financial reports. For another, Pre-Paid has been found guilty of fraud in one of the many legal battles that has been dogging it for years. Financial experts found the first matter especially troubling. In a regulatory filing on Tuesday, Pre-Paid disclosed that its independent auditor, Grant Thornton, has found itself unable to sign off on the company's 2004 financial statements due to "material weaknesses" with the company's internal controls. More specifically, Pre-Paid said that Thornton has raised questions about the company's processing of commissions -- which have led to material restatements in the past. For Massachusetts investment strategist Peter Cohan, the news carried a familiar ring. "This raises the possibility that the company will again be forced to restate those commissions," said Cohan, who has no position in the stock. "It kind of makes you wonder what is going on. Did the company really comply with what the Securities and Exchange Commission required before?" As a matter of policy, Pre-Paid refuses to comment in stories by TheStreet.com because it believes the coverage is biased.
In 2001, the SEC forced Pre-Paid to start treating commissions paid to its sales associates as expenses rather than assets. The change cut the company's reported earnings by more than half. Moreover, it marked the second time the company found itself adjusting its treatment of commissions and slashing its reported profits as a result. For now, however, the company has escaped a so-called qualified opinion from its auditor and the need for additional restatements. Instead, Thornton has simply offered no opinion at all until the company addresses problems with its internal controls. Shares of Pre-Paid fell 1.1% to $34.81 on the disclosure. Still, one financial expert said the news could have been worse.