SEC Criticizes Pre-Paid Legal Services' Accounting

Article excerpt

The Securities and Exchange Commission's chief accountant has decided Pre-Paid Legal Services' accounting policies for commission advance receivables do not conform to generally accepted accounting principles, Ada-based Pre-Paid said Wednesday.

That opinion, conveyed in a July 24 letter to company officials, concurred with the prior staff opinions of the Division of Corporation Finance and Office of the Chief Accountant, and may impact a host of lawsuits filed against the company.

Pre-Paid officials said they are exploring what - if any - actions will be taken in response.

Randy Harp, Pre-Paid's chief operating officer, disagreed with the SEC opinion.

We continue to believe our current accounting policy is in accordance with generally accepted accounting principles, he said. Pre-Paid said its accounting policy reflects the economic reality of our business and clearly illustrates to our shareholders the progress of our business in a given reporting period.

How we eventually report our financial results does not change the cash economics of our business, it merely changes the timing of reported earnings, Harp continued. As noted in our May 16, 2001, and June 28, 2001, press releases, the SEC's proposed accounting would have a material adverse effect on the company's balance sheet and results of operations.

Based on preliminary estimates, Harp pointed out the firm's pro- forma earnings per share for the first quarter of 2001 would fall to 27 cents per share from 60 cents per share under Pre-Paid's policy. Fiscal 2000 results would drop to 81 cents from $1.92, and fiscal 1999 results would plunge to 57 cents per share from $1.67.

The SEC inquiry of Pre-Paid, the developer and marketer of legal expense plans, was initiated after numerous lawsuits were filed against the company and industry analysts criticized the company in a Wall Street Journal article.

That criticism centers on how the company classifies at least some of its sales commission payments as assets. …