Barrett Business Services (Nasdaq: BBSI) understated its workers’ comp expenses by roughly $12 million for 2013 when it was still self-insured in California. That number is critical. BBSI announced the finding as part of the termination of its chief financial officer. He admitted that he was falsifying the company’s financial records during every quarter of 2013 and perhaps beyond. There was other falsified data.
Officials at the Office of Self Insurance Plans are reporting an increase in claims handling problems and under-reserving among self-insured employers but citing confidentiality rules refuse to identify Barrett positively (see related story above). BBSI officials did not respond to a request for comment. However, its self-insurance program covers adjustments for losses during periods in question in both stories.
Possible Criminality
In a filing with the Securities and Exchange Commission the company said it had “determined that the Company’s previously issued financial statements (i) for the fiscal years ended December 31, 2012, 2013 and 2014, and each respective quarter in those fiscal years, and (ii) as of and for the quarters ended March 31 and June 30, 2015, must be restated and should not be relied upon.” Its CPA at the time said there were possible criminal implications. The company is in the process of hiring a “Big Four” accounting firm to conduct a forensic accounting investigation of its financial records dating back to the Jan. 1, 2011.
The filing also revealed that the falsified data overstated BBSI’s payroll costs by $1.4 million, payroll taxes and benefits expenses by $9.7 million and selling, general and administrative expenses by $900,000. The company did not offer an explanation as to why former CFO James Miller made the false entries but says he disclosed the information at a March 3 Audit Committee meeting.
“The Company’s previously issued financial statements (i) for the fiscal years ended December 31, 2012, 2013 and 2014, and each respective quarter in those fiscal years, and (ii) as of and for the quarters ended March 31 and June 30, 2015, must be restated and should not be relied upon.”
BBSI’s board appointed Thomas Carley to serve as interim CFO. Before the appointment, Carley chaired BBSI’s audit committee.
The financial markets did not take kindly to the latest revelation from BBSI. The company was trading at over $36 per share before the news was released. BBSI’s shares lost as much as 38% of their value in trading the following day before closing at $24 per share. Shares later recovered more of their value and as of press time were trading in the upper $20s. BBSI’s shares once upon a time traded at nearly $100 per share, but that was before its initial disclosure of its workers’ compensation under-reserving problem.
Restatements Coming
BBSI still has not filed its third-quarter 2015 10-Q with the SEC nor its 2015 annual report and is in danger of being delisted from Nasdaq. The stock exchange is giving Barrett until April 29 of this year to make the filings, but BBSI officials were warning as of Monday that they may not meet the deadline.
At the earliest the company says it will file the reports after it completes this planned independent forensic accounting review. “No assurance can be given that the Company will be able to file the 2015 third quarter 10-Q and 2015 10-K (as well as any amendments to previously filed reports that may be required) by April 29, 2016,” the company reported to the SEC.
On Monday it announced that it currently intends to file its 2015 third quarter Form 10-Q, its amended quarterly reports on Form 10-Q for the quarters ended March 31 and June 30, 2015, and its amended annual report on Form 10-K for the year ended December 31, 2014, as well as unaudited financial results for the fourth quarter and full year, ended December 31, 2015, no later than April 29, 2016. BBSI says it also intends to file its 2015 Form 10-K no later than May 9, 2016.
In addition to the delayed filings, Barrett is in the process of restating its June 30, 2014, and September 30, 2014, consolidated financial statement to recognize the $80 million workers’ comp reserve charge earlier than initially reported. The company says the charge will be moved to the second quarter financial report. The restated third quarter 2014 results will also include a $3 million reserve increase to cover unallocated loss adjustment expenses “that would be incurred if the Company ceased to provide workers’ compensation claims services in the future,” BBSI noted in its SEC filing.
These restatements are the result a letter from its independent auditor that raised legal concerns about when the company should have recognized the $80 million reserve charge for its workers’ comp program. The letter from Moss Adams prompted the company to launch an independent investigation by outside counsel that ultimately cleared BBSI of any wrongdoing.
BBSI is also in the process of restating its loss adjustment expenses because it was not reserving for future medical cost containment expenses. The company had been accounting for MCC costs only as they were incurred, but accounting rules require companies to estimate the fees that will be accrued.
“As a result of the change in accounting treatment for the MCC fees, the Company’s preliminary estimate of increases in workers’ compensation expense for the years ended December 31, 2013, and 2014 is approximately $664,000 and $685,000, respectively. Also, as of December 31, 2012, retained earnings shown on the Company’s balance sheets is expected to be approximately $7.9 million lower due to the effect of the accrued liability for earlier periods,” the company noted in its SEC filing.
Medical cost containment services typically cover items like bill review and utilization review services, as well as medical provider network fees.
BBSI admits there were also problems with its calculation of federal and state unemployment taxes.
“The financial statements for the second, third and fourth quarters of each of 2013 and 2014 will also reflect the correction of an error resulting from the Company’s conversion of its payroll software during 2013. In connection with the conversion, incorrect rates were entered for the calculation of federal unemployment taxes and California state unemployment taxes. The correction of the error will result in moving approximately $3.0 million of payroll tax expense from 2014 into 2013,” BBSI noted.