Quality Distribution Inc., which went public last November, has announced that it will restate its results going back to 2001.
The largest U.S. operator of bulk tank trucks said it discovered unauthorized actions by a former manager as well as accounting irregularities at Power Purchasing Inc., a non-core subsidiary that helps independent contractors obtain various lines of insurance for which PPI derives fees as a broker.
The company said the former manager, acting alone, failed to renew certain insurance policies for PPI’s customers yet continued to collect premiums in violation of insurance laws. She also concealed these activities from the company.
In addition, noted the company, the former manager recorded improper receivables and deposits from third parties and failed to set up adequate reserves for claims during the periods that PPI’s customers were not insured by third parties.
A company spokesman told Reuters on Tuesday that the employee had been terminated in October before the IPO launched after “it was clear she violated company policy and state [insurance] regulations.” The spokesman added that the employee did not appear to be enriching herself by “improperly doing things when insurance had not been renewed.”
The company added that the investigation was initiated by its internal audit department and is currently being conducted by the audit committee of the board of directors, with the assistance of outside legal counsel and a forensic accounting firm.
As a result of the accounting and insurance issues, Quality Distribution said it will restate its financial statements for the nine months ended September 30, 2003, as well as for the years ended December 31, 2002, and December 31, 2001.
The reduction to operating income is expected to total about $10 million for the period prior to 2003 and about $6 million for the nine months ended September 30, 2003. Part of the reduction to operating income will not impact the company’s operating results for periods subsequent to 2003. About two-thirds of the restatement is expected to consist of non-cash charges.
The company expects to incur charges in the quarter ended December 31, 2003, in connection with insurance regulatory issues arising from the irregularities at PPI, and it expects to incur additional expenses in 2004 relating to the investigation.
The announcement is also not good news for Credit Suisse First Boston and Bear Stearns, lead managers for the November initial public offering of 7 million shares at $17 a pop. Quality Distribution closed the first day at $18.75, up more than 10 percent; it closed Thursday at $15.55.
“This is embarrassing for the underwriters, the accounting firm and the SEC,” Francis Gaskins, of online newsletter IPO Desktop told Reuters. Gaskins added that he could not recall a similar case in which a company was forced to restate earnings just three months after completing the accounting scrutiny needed for an IPO.