March 10 (Bloomberg) -- EchoStar Communications Corp., the No. 2 U.S. satellite-television company, may have improperly booked transactions with suppliers and made suspect consulting payments to a friend of Chairman and Chief Executive Officer Charles Ergen, said people familiar with an internal probe of the company's accounting.

The investigation by EchoStar's audit committee was prompted by KPMG LLP, which uncovered evidence of potentially illegal conduct while auditing the company's 2004 accounts, the people said. The U.S. Securities and Exchange Commission also has opened an inquiry into Ergen's role in EchoStar's accounting, said two of the people, who declined to be identified.

The situation threatens to weaken Ergen's grip on the company he founded in 1980 and still controls, with 91 percent of the shareholder votes and stock valued at about $7 billion. Once the audit committee presents its findings to Ergen, 52, KPMG must then decide whether EchoStar is going far enough to address the failings or refuse to sign off on the company's accounts, said three of the people familiar with the matter.

``Auditors in this environment are tending more often than not to be conservative and risk-averse,'' said William McLucas, a former SEC enforcement chief who isn't representing EchoStar and isn't privy to details of the case. ``The problem for anybody in a situation like this, including auditors and board members, is that the decisions they make are going to be scrutinized with 20/20 hindsight by shareholders and regulators.''

Careful Audit

Ergen and Raymond Friedlob, the chairman of EchoStar's audit committee, didn't reply to telephone and e-mail requests for interviews. Steve Caulk, a spokesman for Englewood, Colorado- based EchoStar, declined to comment today.

``We decline to comment on the basis of client confidentiality,'' said Tom Fitzgerald, a spokesman for KPMG. SEC spokesman John Heine also declined to comment.

Shares of EchoStar fell $1.87, or 6.1 percent, to $28.72 in Nasdaq Stock Market trading, the biggest one-day decline since May. The stock had dropped 10 percent in the 52 weeks that ended yesterday.

Jeff Wlodarczak, an analyst at Wachovia Capital Markets, wrote in a note to clients today that EchoStar's auditors may have been extra careful in combing through the company's books because of Ergen's dominant control.

``It is unclear what the issues are, how sizeable the transactions are, and adjustments EchoStar will need to make or the size of the adjustments,'' said Wlodarczak, who rates EchoStar shares ``outperform.'' ``It may be as little as a timing difference on payments, a slap on the wrist for the consulting payments, and more stringent controls.''

Company Records

Friedlob, a partner at the law firm McKenna Long & Aldridge LLP in Denver and an EchoStar director since 1995, retained outside counsel to review KPMG's concerns. Among the evidence his investigation uncovered were company records that showed Ergen may have directed or authorized vendor transactions and consulting payments to an unidentified friend, the people said.

EchoStar's relationships with suppliers involve such dealings as buying the rights to carry TV channels on its Dish Network from media companies. Lockheed Martin Corp. of Bethesda, Maryland, supplies EchoStar with satellites.

Also on the audit committee with Friedlob are Steven Goodbarn, president of Secure64 Software Corp. and former chief financial officer at Janus Capital Corp., and Michael Schroeder, founder of Consumer Satellite Systems Inc. EchoStar's Web site lists Goodbarn, a trained accountant, as the committee's financial expert.

Change for Auditors

KPMG is operating under the strictures of the Sarbanes-Oxley Act, passed in 2002 in the wake of Enron Corp.'s bankruptcy. The law requires auditors to determine whether a company has proper safeguards to thwart fraud and ensure accurate accounting and financial reporting.

``The whole world has changed for audit firms over the past few years since Enron and the passage of the Sarbanes-Oxley Act,'' said former SEC accountant Carr Conway, 61, now the head of forensic accounting at Dickerson Group Inc. in Denver. ``They're now being extremely careful about things like certifying that management's assessment of a company's internal controls is adequate.''

EchoStar, which has a stock market value of about $13 billion, is scheduled to report fourth-quarter earnings on March 17. The company had sales of $5.74 billion in 2003 and reported a profit of $225 million.

Last year, Ergen was ranked 23rd on Forbes magazine's list of the 400 richest Americans, with a fortune of $7.3 billion. Wlodarczak said in his note that Ergen may decide to take EchoStar private should the accounting concerns prove to be minor and the stock remains depressed.

Blackjack Player

A onetime professional blackjack player who was once thrown out of a Las Vegas casino for counting cards, Ergen made EchoStar the first commercially viable alternative to cable TV.

He co-founded the company with his wife Cantey and James DeFranco, 52, both of whom still sit on EchoStar's eight-member board, and sold satellite dishes out of the back of his truck in Colorado.

``He all but started the industry, selling C-band dishes door to door,'' said Craig Moffett, an analyst at Sanford C. Bernstein in New York, in a March 8 interview.

EchoStar launched its first satellite, from China, in 1995 and started broadcasting the following year. The company's product, dishes as small as 18 inches wide typically mounted on the side of a house, replaced the giant receivers that sat on pedestals in backyards across the rural U.S.

Failed Takeover

By October 1999, EchoStar had 2 million customers and its shares were soaring. The stock, which began that year at $5.75, surged more than eightfold by Dec. 31 and peaked at a close of $79 in March 2000.

Ergen sought to make EchoStar even bigger and in 2002 made a failed $27 billion bid for Hughes Electronics Corp., owner of rival DirecTV. EchoStar now trails DirecTV Group Inc., which eventually was bought by Rupert Murdoch's News Corp.

At the same time, Ergen has kept himself distant from investors, refusing to attend most industry conferences and rarely speaking with shareholders except during EchoStar's quarterly conference calls.

Struggle for Access

One of the few opportunities to get time with Ergen was at his annual poker game. Matt Harrigan, an analyst at Janco Partners Inc. in Greenwood Village, Colorado, said he recalls crowding into a Denver hotel suite where about 25 investment fund analysts would eat hors d'oeuvres, drink beer and play for ``nominal amounts of money'' late into the night.

``It's really one of the building blocks of his image,'' said Harrigan, who attended one of Ergen's games about three years ago and didn't play. ``It was a good way to bond with him.''

Ergen has since given up the annual poker game.

``It used to be the only way you could get to Charlie was if you played poker with him,'' said William Jacobs, an analyst at Chicago-based Harris Associates LP, EchoStar's sixth-largest shareholder. ``It's a struggle to get to him.''

Harris, which manages about $40 billion, bought 3.4 million EchoStar shares in the fourth quarter. Other shareholders include Fidelity Investments and Janus Capital Group Inc., according to SEC filings.

In a Nov. 17 filing with the SEC, EchoStar said that the departure of Ergen for any reason ``could have a materially adverse effect on our business.'' Since July, the SEC has been examining the way EchoStar and about 19 other companies in the telecommunications industry account for subscribers.

To contact the reporters on this story: Otis Bilodeau in Washington at obilodeau@bloomberg.net Chitra Somayaji in New York at csomayaji@bloomberg.net.

Last Updated: March 10, 2005 16:39 EST