Seagate Cans Distributor for Blocking 3rd-Party Audit

Seagate Technology has broken off its distributor relationship with Singapore’s eSys Technologies, previously the company’s largest distributor, after it denied access to its accounts for an audit, the hard-disk maker said in a U.S. Securities and Exchange Commission (SEC) filing.

“ESys officials also indicated to the company that an audit would likely reveal irregularities in eSys’ compliance with the terms of the company’s incentive programs and other unspecified irregularities,” Seagate said.

In a statement, eSys denied allegations of wrongdoing and pledged to pay all outstanding payments owed to Seagate. ESys refused to permit the audit because it would have violated the confidentiality of information related to its customers. “The intrusive nature of the audit would not be justifiable to our worldwide business partners under normal business practices,” eSys said.

The relationship between the two companies finally broke down this week, when eSys told Seagate that third-party auditors would not be allowed to examine its accounts to confirm the accuracy of eSys’ claims for credits under Seagate’s distributor sales incentive program. The decision not to allow the auditors to examine the accounts came after several weeks of talks between the two companies related to the audit, Seagate said in the filing.

ESys had been Seagate’s largest distributor for all products during its 2006 fiscal year, handling 5 percent of the company’s total sales, Seagate said. During the most recent quarter, which ended on Sept. 29, eSys handled 6 percent of the company’s sales, it said.

In its most recent earnings report, Seagate recorded an allowance of US$40 million against “doubtful accounts” related to its relationship with eSys. As of Nov. 5, eSys owed $50 million to Seagate, the filing said, noting that the distributor had pledged to pay the outstanding amount due.

While the distributor relationship between Seagate and eSys is over, the hard-disk maker insists it will pursue its contractual right to a third-party audit of eSys’ sales records, as well as claims for any “intentionally wrongful conduct,” the filing said.

-Sumner Lemon, IDG News Service (Singapore Bureau)

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