The SEC is charging Miller Energy, a Houston-based company involved with exploration and production of oil in Alaska, its COO/CFO, and the company’s independent audit team leader with accounting fraud. Miller Energy was delisted from the New York Stock Exchange last month because its stock was trading under $1, which is in violation of NYSE rules. Upon acquiring the assets in Alaska’s Cook Inlet area in December 2009, Miller Energy overstated their values by more than $400 million, which allowed the company in 2010 to inflate net income and overstate assets. The company used accounting deception to propel its stock from less than a dollar to an all-time high of nearly $9 in 2013. The SEC is charging that “Miller Energy falsified financial statement information and that the company’s independent auditor failed to conduct an audit that complied with professional standards.”
Details of the Accounting Deception: Miller Energy paid $2.25 million in cash to purchase the Alaska properties and assumed another $2 million in liabilities. Yet through its reliance on fictitious accounting, Miller Energy reported the acquired assets at a value of $480 million in 2010. What are the odds that, in a competitive oil and gas market (and in an “arms-length” transaction), a property with proven oil and gas reserves valued at nearly $480 million is being sold for a meager $4.25 million!
What is the accounting outcome when an asset is purchased less than its fair market value? The company books a “bargain purchase gain” which is recognized in the income statement. The buyer benefits in two ways, (1) the assets are inflated and (2) an income/gain is recognized on the income statement. Miller Energy recognized a bargain purchase gain of $461 million in 2010. This gain resulted in the company increasing its income from $11.5 million in 2009 to $444 million in 2010, which translates into a 3,700% growth in income. What is noteworthy is that the cash flows in 2009 and 2010 were both negative. Therefore, by relying on inappropriate accounting, the company is claiming a growth in operations of 3,700% when it operations are resulting in negative cash flows for the same period.
The Auditor’s Role: How much did its auditors charge for this service? They charged a meager sum of $66,500 in 2009 and $128,500 in 2010. The SEC’ is seeking to bar the auditor from serving as an auditor of public company accounting (the auditing company has already been dissolved).
Miller shares closed down 3 cents at 14 cents last week.
http://www.sec.gov/news/pressrelease/2015-161.html
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