Tesco's Mea Culpa: A Multitude of Accounting Errors

Mar.21.07 | About: Tesco Corporation (TESO)

Accounting know-it-alls will always tell you all the fun stuff is in the footnotes. And oilfield services company Tesco Corp.’s (TESOF) footnotes — labeled A through G in the company’s amended consolidated interim financial statements, the unaudited version — are chock full of confessions about accounting errors.

The document, filed Monday, is prefaced with an explanation about why the restatements were necessary.

Let’s start there. Tesco said the restatements came after it transitioned into a domestic reporting issuer in the United States from its previous incarnation as a foreign private issuer, making it subject to reporting and disclosure requirements south of the border.

The former Calgary, but now Houston-based company also evaluated its internal controls over financial reporting in order to be onside with Sarbanes Oxley rules.

Tesco also launched a “self-initiated review of our past stock option granting practices and related accounting. Tesco notes that the review of its stock option practices did not uncover any evidence of fraud or manipulative intent.”

As Tesco was putting together its initial annual report on Form 10-K for Dec. 31, 2006, including its stock option review and evaluation of internal controls, the company picked out errors “that resulted in a material misstatement of our previously reported results for the three months ended June 30, 2006 and the three months ended September 30, 2006.”

And so Tesco restated results for the first three months and nine months ended September 30, 2006.

Here are the errors the company found at certain points during the period:

• The company “improperly billed certain costs to a customer which were not included in the service agreement...and as a result both revenues for the nine months ended September 30, 2006 and accounts receivable—trade at September 30, 2006 were overstated.”

• Tesco “improperly recorded an adjustment to its inventory balance related to downhole tools manufactured by the research and engineering group. As a result of this error research and engineering expense was understated and inventories were overstated.”

• Depreciation expense was not calculated properly, and as a result depreciation expense was understated and property, plant and equipment, net was overstated.

• Tesco recorded late entries to a sub-ledger that were not reflected in the company’s general ledger. The resulted in cost of sales and services and accrued liabilities being understated.

• “The corporation did not properly calculate the fair value of certain stock option grants to employees and it did not properly account for modifications to grants for severed employees and employees that became consultants to the corporations,” the document says. “As a result of these errors, stock compensation expense was understated with a corresponding adjustment to capital surplus.”

• The above five errors resulted in Tesco’s income tax expense being overstated and its future income taxes asset being understated.

• Tesco didn’t properly calculate the conversion of historical share capital activity from Canadian dollar to U.S. dollar when it adopted the U.S. dollar as its reporting currency. As a result, share capital was understated and cumulative translation adjustment was overstated.

According to the revised financials, Tesco’s net income for the nine months ended September 30, 2006 totaled US$18.68-million, down from US$20.622-million in previously reported financial results. This dropped earnings per share to US51¢, down from US56¢ on a diluted basis. Basic earnings per share fell to US52¢ from US58¢.