Tag Archives: Accounting mis-statements

Houston company to revise results after overstating Accounts Payable

DXP Enterprises, an industrial distributor based in Houston, has announced that it is unable to file its latest quarterly report because it has discovered that it has $8 million to $12 million of ‘unvouchered purchased orders included in its trade accounts payable’ that are not valid obligations that will be invoiced or paid.



The company states that some of these balances are more than three years old. In its unaudited results for the six months to June 2021, the company states that any change will likely be immaterial in 2021. For the comparable period in 2020, the amount is less than $1 million. That implies that most of these balances are at least 18 months old.  The company plans to restate the trade accounts payable balance to the correct amount and flush the gain (less tax impact) through retained earnings.

DXP distributes maintenance, repair and operating products to energy and industrial customers, primarily in North America. It has a market capitalization of $567 million. One of its three business segments is Supply Chain Services…

For context, for the past five years, the company has had revenues of between $1 billion and $1.2 billion. It reported net income of $16 million in 2017, $36 million in 2018 and 2019 before making a loss of $29 million in 2020. The trade accounts payable has been around $75 million to $82 million. Therefore, a $10 million dollar error out of $80 million is a big miss.

Moss Adams, the company’s auditor, has not yet completed its review of the proposed adjustment.  Additionally, the company is in ‘the process of assessing the impact of this issue on our assessment that our internal control over financial reporting is effective’.

CFO Kent Yee was appointed in June 2017 and Chief Accounting Officer Gene Padgett joined in May 2018.

SEC filings – DXP – restatement

 

KBR pays $2.5 million penalty to SEC to settle charges over inflated earnings

The SEC has announced that KBR has agreed to pay a $2.5 million penalty, without admitting or denying wrongdoing, with regards to its 2013 quarterly and annual filings.

The SEC alleges that the Canadian pipe fabrication business of KBR overstated earnings by $156 million in 2013 because it under-estimated costs to complete on 7 fixed-price contracts. In fact the contracts were loss-making.

The SEC also alleges that KBR included $459 million in backlog in the second quarter of 2012 relating to these contracts with a Canadian energy company, despite the fact that the customer hadn’t placed any orders with KBR at that time.

In May 2014, KBR restated its annual 10-K report for 2013 and removed $360 million from backlog (the $459 million less work orders received since the initial recording).

The SEC alleges that the Canadian business did not have sufficient training or controls in place, Oversight from the corporate office in Houston was also limited, though the issue came to light in April 2014 when the corporate office started questioning why unbilled revenues were rising rapidly.

The SEC noted that KBR took remedial acts to resolve the issues and clawed back bonuses from employees who have received bonus compensation as a result of the overstated revenues.

In its annual proxy for 2015, the company stated that it had clawed back bonuses from former CEO, William Utt (who retired as CEO in April 2014) and the former Chief Accounting Officer, Dennis Baldwin (who resigned in March 2014 to join Cameron and is now currently the Chief Accounting Officer at Rowan), as well as one other executive who left in February 2016.

The current CEO, Stuart Brodie, joined in June 2014 after the restatement and therefore was not affected by the clawback. Brian Ferraioli, who was CFO between October 2013 and February 2017, was not impacted either as he did not originally receive any bonus related to 2013.

 

Transocean delays annual filing citing internal control weaknesses

Deepwater Champion – Michael Elleray

Uh-oh. Transocean (market capitalization $5.5 billion), the leading operator of drill ships that has its operational headquarters in Houston, has disclosed that it will be late in filing its 10-K as the company ‘expects to disclose a material weakness in its internal control over financial reporting related to its controls over income tax accounting’.

No amount were disclosed and no timing was given as to when the 10-K would be filed. It should be noted that the company has already disclosed its results for the full year.

Let’s hope the Transocean tax department didn’t go to the Weatherford school of accounting. Weatherford was fined $140 million by the SEC in September 2016 for booking topside tax entries without supporting documentation.

Weatherford’s auditors are Ernst and Young who paid an $11.8 million settlement to the SEC in relation to the audits. Transocean’s auditors are… drum roll, please…Ernst and Young!

Transocean’s share price only dropped about 1 per cent on the news, though corporate litigation firms are ready to file shareholder lawsuits.

Exterran unable to file 10-Q – accounting restatement ongoing

extn-share-price

 

Exterran today announced that it was unable to file its 10-Q by the required deadline. Back in April, it notified investors that it had found possible errors in applying percentage-of-completion (POC) accounting for some Middle East contracts being performed by its Italian subsidiary. As a result the company said it would have to restate its 2015 results.

The company hasn’t quantified the possible errors, so I thought I would take a look. In the 2014 10-K, the Italian subsidiary was barely mentioned. There is one note referring to a decline in gross margins in 2015 in part due to schedule delays on projects in the Eastern hemisphere.

In the 10-K the following is disclosed regarding POC contracts. Note that these figures are for the whole company and not just the Italian subsidiary.

2015 2014
Costs incurred on uncompleted projects $723 $812
Estimated Earnings $84 $135
Revenue recognized $807 $947
Less Invoiced to the customer $(726) $(902)
Unbilled costs $81 $45

In other words, the company took $807 million in revenue on projects using POC accounting. This was 43% of total revenue in 2015, the same percentage as the previous year. The profit margin dropped from 14.2 % to 10.4%. However the unbilled costs rose from $45 million to $81 million which should have been a big red flag given the declining revenue base. Put another way, the net unbilled as a percentage of revenue rose from less than 5% to 10%.

In 2015, Exterran reported gross profit of $262 million and income before income taxes of $30 million, so any restatement could substantially wipe out 2015 income (unless much of the restatement is pushed back into 2014 or prior).

Note also that Exterran was spun out of Archrock in October 2015, so there could be implications for Archrock if the issues were occurring prior to the spin-off.

In August, Exterran announced the sale of part of the Italian business. No sales price was disclosed, however they did announce the sale would trigger a $67 million impairment in goodwill and long-lived assets.

Back in May, the company received a delisting notice from the New York stock exchange for non-compliance and earlier this month the company announced the appointment of a new CFO.