IDB stock rises after news on auditing flap.

Wall Street gave IDB Communications Group, Inc. its vote of confidence last Tuesday (June 14) following the disclosure by Deloitte & Touche as to why it quit auditing IDB's books. The news boosted IDB stock up to $10.50 a share before profit-taking closed it at $9.75, up $1.63 on the day.

Investor concerns over just why the Big Six accounting firm left the Culver City telecommunications maverick had sent IDB's stock from a May 31 close of $14.50 a share to a low of $5.25 the following day. It also sparked an informal investigation of IDB by the Securities and Exchange Commission.

Last Monday, Deloitte confirmed IDB's statement that the accounting firm quit over differences involving first-quarter 1994 transactions. More importantly, it did not disclaim the clean bill of health it gave IDB during the prior two fiscal years.

But Deloitte also pointed out that it did not agree with IDB's assessment that it resigned abruptly, and it denied IDB's claim that the company offered to delay filing its 1994 quarterly financial statements or delay issuing a April 25 press release until the questioned transactions were resolved.

According to the accounting firm, it had discussed "on numerous occasions" unresolved and disputed pre-tax transactions relating to IDB's first-quarter filings for 1994. The transactions included revenues from the sale of transponder leasing rights, accounting adjustments for earlier business acquisitions, and a provision for doubtful accounts.

On May 13, Deloitte alleged that it informed IDB "if the Registrant filed its quarterly report on Form 10-A including the (disputed transactions of) $5.5 million, Deloitte would resign."

By May 23, the unresolved amount had only been trimmed to $5.4 million.

"There had been a serious breakdown in the process of identifying, analyzing and recording the Registrant's business transactions which prohibited the satisfactory completion of a quarterly review," stated Deloitte's letter to the SEC.

Despite this assessment, the market seemed relieved by the disclosure.

"I actually think that the stock is a screaming bargain at these prices for two reasons," said Michael Mahoney, portfolio manager of GT Global Telecommunications fund in San Francisco. "The primary reason is the inherent value of IDB's gateway ownership rights around the world."

A gateway, explained Mahoney, is the right to switch telephone calls into a given country. "IDB has the rights to switch into most of the top 15 markets," Mahoney said.

In addition, he added, "the Deloitte & Touche comment that IDB's financial controls deteriorated in the first quarter of 1994 is promising because it was over a short period of time. Therefore, problems can, hopefully, be arrested."

Other analysts, notably those from the investment banks that underwrote IDB'S $472.9 million secondary stock offering last November, declined to comment due to a class action lawsuit filed earlier this month in the U.S. District Court in Los Angeles against these companies by shareholders that bought the issue.

The suit alleges untruthful statements, misrepresentations and omissions in the prospectus and registration statement.

The November transaction, co-managed by New York's Merrill Lynch & Co. and Smith Barney Shearson, and San Francisco's Hambrecht & Quist and Sutro & Co, was the largest secondary offering ever completed for a NASDAQ stock, according to NASDAQ spokesman Richard Meyers.

"We believe the claims are without merit," said a spokesman for Merrill Lynch. "It even appears that the claims relate solely to a time after the underwriting in which we were involved."

IDB has also been served with shareholder lawsuits, said spokesman Peter Hartz. "I believe there are 21," he told the Business Journal. "We think that those will consolidate down to -- essentially -- one case," he added.