Dive Brief:
- The U.S. Securities and Exchange Commission (SEC) is investigating SAExploration over "certain accounting matters" between 2015 and 2016, the Houston Business Journal reported Thursday. The issue at hand is the company's accounting for its relationship with Alaska Seismic Ventures (ASV), an LLC which was determined to be a variable interest entity (VIE) and, therefore, required to consolidate into the company's reported financials.
- The Houston-based seismic acquisition operations company will restate previously issued financial statements for fiscal 2015 through 2018, it said last week in a statement. That will delay the company's June 2019 10-Q filing.
- SAExploration has named Michael Faust its new chairman. He replaces Jeff Hastings, who has resigned, according to Seeking Alpha. Kevin Hubbard will serve as interim CFO in the wake of former CFO Brent Whiteley's departure.
Dive Insight:
SAExploration's shares plunged 32% following the news the SEC is looking into their “account irregularities” from 2015 and 2016.
ASV is described as a "data library company" for whom SAExploration performed seismic services. SAExploration disclosed it had a "material weakness" in its internal controls over ASV's financial reporting, while "disclosure controls and procedures were ineffective" during the periods in dispute.
A VIE is a business structure where the company — in this case, SAExploration — has a controlling interest in another, despite lacking a majority of share ownership. VIEs are often created for R&D purposes, but can be used to shift assets from the company's balance sheet. However, federal securities laws stipulate that, despite a lack of majority share of ownership, if SAExploration is the primary beneficiary, it must disclose its relationship to ASV on the consolidated balance sheet of its 10-K. SAExploration did not consolidate ASV into its financials, which led to the disclosure and to the eventual restatement of past financial reporting.
Hubbard, who along with the company did not respond to a request for comment, may take cues from other companies that have had to restate their earnings while embroiled in scandal on how to restore public trust.
Food giant Kraft Heinz was required to restate nearly three years of financial disclosures after an SEC investigation revealed "several employees in the procurement area engaged in misconduct," Supply Chain Dive reported in May. Kraft Heinz was subpoenaed for documents related to its accounting practices and procurement function.
Restating past earnings, along with being costly to a company's bottom line, erodes customer loyalty, and an executive board's new leadership must show substantial, good-faith efforts to restore the trading public's trust.
Despite the investigation, day-to-day operations at SAExploration remain unchanged, according to their press release, and the company is continuing to deliver "outstanding results" for customers and investors, Faust said. Of note, Faust also serves as interim president and CEO of Obsidian Energy, a Canadian oil and gas company, SAExploration said in the press release.
Access the SEC report here.
