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CFO Blamed for MedQuest Restatement

The SEC says that alleged reporting violations by the medical imaging company's finance chief led to major restatements.
Marie LeoneOctober 19, 2007

MQ Associates and its former chief financial officer have been cited by the Securities and Exchange Commission for alleged reporting violations that led to a major restatement. As a result, the holding company and its former executive, Thomas C. Gentry, agreed to a cease-and-desist order without admitting or denying any of the findings, says the commission.

The SEC alleges that Gentry and MQ, which owns MedQuest Inc., a provider of medical imaging services, committed reporting violations, failed to keep accurate books and records, and failed to maintain an adequate system of internal accounting controls. These failures resulted in a restatement of its financial statements for the 2002 and 2003 years, for all quarters during both of those years, and for the first three quarters of 2004.

Altogether, the restatement resulted in a $34.7 million reduction of net income and had a major impact on the company’s bottom line. During the first nine months of 2004, the adjustment reduced results by more than 300 percent, from a profit of $4.6 million to a loss of $11 million.

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Further, in 2003, the restatement changed a $5.2 million profit into a $2.8 million loss, and in 2002 it swung the company’s profit of $1.2 million into a loss of $3.7 million. The SEC says MQ’s restatement largely resulted from an understatement of its allowance for contractual adjustments for accounts receivable.

The SEC’s order also finds that Gentry was a cause of the company’s violations. The regulator explains that when services were rendered, MQ booked the transaction by recording revenue and accounts receivable at equal gross amounts. However, MQ was seldom compensated for the gross billable amount because its contractual arrangements with insurance carriers and governmental reimbursement rates often stipulated payment at rates significantly lower than the gross rate.

Due to the difference between the gross and net billable rates, MQ established an allowance for contractual adjustments, which was deducted from the gross accounts receivable total to calculate net reportable accounts receivable, the SEC concludes. “This allowance was materially understated, which resulted in MQ Associates’ overstatement of accounts receivable and revenue,” it adds.

MQ’s debt is registered with the SEC and is lightly traded, according to the regulator. Its equity is privately held.

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