Penn West Petroleum (TSX: PWT,Stock Forum) got into some hot water with its investors as law firms piled on to launch class action suits for alleged violations of the federal securities act after the company announced it was going to initiate an internal review of its accounting practices in a statement dated July 29, 2014.
According to the news release, the review was requested when the company's Senior Vice President and CFO, David Dyck, after his appointment at the beginning of May, discovered certain accounting practices that appeared to have been made to reduce operating expenses and increase the company's reported capital expenditures and royalties. All of which appeared to have been made without adequate supporting documentation.
Specifically the review covered practices involving the capitalization of certain operating expenses as property, plant and equipment, the income statement classification of certain costs and credits, the timing of certain accruals relating to production, operating expenses and capital and the timing for the recording of certain production volumes.
An Audit Committee was created using independent members of the company's board of directors, who then retained independent Canadian and US legal counsel and enlisted an independent forensic accounting firm to assist the committee in its review.
The Audit Committee made a decision to restate the company's audited annual financial statement for at least the years end December 31, 2012 and 2013, and its unaudited interim financial statements for the three months ended March 31, 2014 and 2013 and all related MD&A. As a result the company announced that there could be a delay in filing its unaudited comparative interim financial statements for the three and six month periods ended June 30, 2014.
Panic set in and class action suits were launched.
The review, which extended back to 2007, allowed the company to correct the accounting practices in question and initiate checks and balances to strengthen its corporate governance, compliance and control processes.
After the review was completed, the company filed its restated financial statements and concluded that the review had no impact on the company's strategic direction.
Rick George, Chairman of the Board, commented, “"Speaking on behalf of the Board, we are resolute in our effort to move the company past the difficult period of the Review and into a new era of enhanced corporate governance and ethics to address our past. We are confident that Penn West's thorough and timely action has identified the accounting practices under review and that we are improving our procedures to prevent recurrences.”
He then concluded, “Further, we are proud of the courage, integrity and ethics demonstrated by Penn West's current management in bringing this matter to light. We are acting on the findings of this Review, and as stated in this release, there is no impact on our strategic direction going forward.”
Traders seemed to take the news well as the company experienced a significant bump in the market.
Penn West went on to release its financial results for Q2 2014 as well as announcing a Q3 2014 dividend.
Shares gained 8.93% on the news to $8.42 per share.
Currently there are 495.0m outstanding shares with a market cap of $4.2 billion.