Workers’ Comp Executive Exclusive

BBSI Under Criminal Investigation by Justice Department

By: Brad Cain

The United States Department of Justice is conducting a criminal investigation of Barrett Business Services, Inc., (Nasdaq: BBSI). Exactly what federal prosecutors are looking for has not been announced, but there are multiple avenues that it could be pursuing. Among them the stated reasons for its traditional declines in first quarter profits.

Moss Adams, BBSI’s independent CPA and auditor, warned late last year that an illegal act has or may have occurred involving the reporting of the company’s workers’ comp reserves.

The Securities and Exchange Commission also has open not one but two ongoing investigations into BBSI’s financial reporting practices. The SEC investigations are related to the company’s accounting practices, its workers’ comp reserving, and to irregularities surrounding the actions – in the form of unsupported journal entries – of its former chief financial officer James Miller.

It is not known at this time if the unsupported journal entries were at the direction of, or with the knowledge of, any other senior officer. CEO Mike Elich signs the SEC documents.

The initial SEC subpoena followed the company’s revelation that it under reserved its workers’ comp liabilities by 62% and had to borrow money to cover the shortfall. The second subpoena arrived after Barrett terminated its former CFO for making unsupported journal entries. An independent forensic audit then found far more accounting irregularities than were initially disclosed.

BBSI was forced last year to hire an independent team of legal investigators to look into its handling of the reserve charge after its independent auditor, Moss Adams questioned what had been reported to the SEC and when.

Barrett had to restate its earlier financial statements to recognize the reserve charge in a prior period. The restatement came even though law firm, BBSI hired, Stoll Berne ultimately said it found no illegal activity.

Barrett management is forced under law to acknowledged the existence of the DOJ investigation. In did so in the same way it disclosed that the SEC was investigating its accounting practices – revealing the information deep into a filing with the SEC. The company did not elaborate on the nature of the on-going investigations and merely says the DOJ notified it in mid-June that it is under investigation.

The company’s tardy first quarter report states that “BBSI received a subpoena from the San Francisco office of the Division of Enforcement of the Securities and Exchange Commission (the “SEC”) in May 2015 in connection with the SEC’s investigation of the Company’s accounting practices [concerning] its workers’ compensation reserves.

In April 2016, the SEC issued a second subpoena to BBSI for documents relating to the disclosures made by the Company following Mr. Miller’s termination. The Company was also advised by the United States Department of Justice in mid-June 2016 that it has commenced an investigation.”

BBSI officials say they are cooperating with all three investigations.

Late First Quarter Results

BBSI’s first quarter report was months late, as was its 2015 annual report. The company was forced to restate its earlier financial reports. The restatements are linked to the reserving errors and the accounting irregularities that are the focus of the SEC investigations and potentially the DOJ investigations.

The repeated inability to file timely financial reports nearly cost the company it’s listing on the Nasdaq exchange. BBSI was called before a Nasdaq hearing panel but, for now, successfully pleaded its case to remain listed on the exchange. The panel has notified BBSI it has regained compliance.

The revelation of the DOJ investigation was made public in the delayed first quarter 2016 report which showed a 15% uptick in revenue when compared to the first quarter of 2015. Net losses, however, were up much more at $8 million for the quarter. The result compares to a $5.8 million loss in the year-ago period – a 38% increase.

Are Payroll Taxes a Profit Center

The company notes that it historically incurs a loss in the first quarter due to higher effective payroll taxes at the beginning of the year. An important question is raised by this admission: If the payroll taxes it charges its clients are simply a pass through and not a profit center, then payroll would not affect profits and losses. Why are they?

The increase in losses though appears to be driven in large part by costs associated with the company’s legal and financial troubles. Of the $2.2 million increase in losses, nearly $1.2 million is due to accounting and legal costs associated with the financial restatements, investigations and the legal proceedings linked to potential securities laws violations. These costs, the company says, are expected to increase in subsequent quarters.

BBSI reports that gross revenues for its PEO operations increased 20% to $1 billion during the quarter. The company reported a net increase of 270 new PEO clients during the period – adding 336 while losing 66 others. It includes payroll as part of its gross receipts. So to the uninformed or uninitiated gross receipts numbers can be deceiving.

On the workers’ comp front, Barrett officials say that its workers’ comp costs increased 22% over the year-ago period. BBSI’s workers’ comp bill climbed to $55.7 million in the quarter compared to $45.5 million last year.

The company covers its workers’ comp exposure through a large deductible policy underwritten by ACE/Chubb. BBSI retains the first $5 million of liability per claim. Company officials report that deposits in a trust account set aside to fund its deductible liabilities climbed to $190.2 million at the end of the quarter – an increase of $23.6 million during the three months.

BBSI also has another $147.2 million in surety bonds and letters of credit on deposit with the California Office of Self-Insured Plans (OSIP) to cover parts of its remaining open claims from its self-insured days.

For our other investigative coverage of BBSI click here

Editors Note: Neither management nor any staff member of the Workers’ Comp Executive now owns or has ever owned BBSI stock.