Just when we thought Herbalife Ltd. (NYSE:HLF)’s channel of non-stop drama was taking a break, it came back with a bang. With as much controversy as possible, KPMG resigned as Herbalife’s auditor today based on an insider trading scandal.

Read more about this here and here.

Herbalife fell to as low as $36.26 today, the declining price was accelerated when D.A. Davidson & Co downgraded Herbalife Ltd. (NYSE:HLF). The stock rating of the nutritional supplements company was slashed to Neutral from Buy and the price target was cut by more than 50 percent, from $78 to $38.

Herbalife Downgraded after KPMG Resigns as Auditor

Since Herbalife, for now, has no auditor and KPMG has withdrawn its financial reports for the past three years, there could be significant delays before new reports are audited.

D.A Davidson thinks that it could take a year for the new auditor to do a review of the company’s accounting. The firm downgraded Herbalife Ltd. (NYSE:HLF) on the basis of three assumptions, the foremost of them is Herbalife getting delisted from NYSE; however, the analyst, Timothy Ramey adds that it is unlikely to  happen.

Moreover, Herbalife will be in violation of its loan covenants during this period and will be unable to continue with its share buyback program. Despite these structural problems, Ramey concludes that their fundamental opinion of Herbalife is unchanged and the company still holds the same value but the circumstances do not warrant a buy rating. Herbalife will get the audit fees reimbursed and could also sue its ex-auditor for damages.

It would have been very sensational if it was anyone related to Bill Ackman or Carl Icahn who got tipped off by KPMG partner but apparently the titans are not involved in this. It appears, the problem is with KPMG here more than it is with Herbalife’s financials. KPMG also resigned as the auditor of Skechers USA Inc (NYSE:SKX) citing  similar reasons.

Bill Ackman has made a $1 billion bet against Herbalife Ltd. (NYSE:HLF) which he calls a ‘pyramid scheme’ and has challenged the accounting practices of the nutritional supplements company.

He at one point said that, “If I were KPMG, I’d take a very, very careful look at that financial statement before I slap my brand on it,”. KPMG may have taken their brand away from Herbalife but the reasons are not those which Ackman had wanted.

Meanwhile Carl Icahn’s 15 percent stake in Herbalife Ltd. (NYSE:HLF) did not scare off Ackman, against whom Icahn holds a long time grudge. Now this added controversy from an entirely unexpected end brings further uncertainity to a stock that has essentially become racquetball between influential hedge fund managers.

Herbalife Ltd. (NYSE:HLF) is down 3 percent now, pushing back up after falling more than 5 percent.