Barrett Business Solutions (NYSE: BBSI) has been forced by law to report that its independent auditor is warning that an illegal act has or may have occurred involving the reporting of the company’s workers’ comp reserves. All of BBSI’s public financial reporting to the SEC since June 30th, 2014 has come into question.
Whether or not this may mean an ignoble end for the company or not it’s too early to tell. It could also raise a plethora of issues for California regulatory bodies and the carriers who issued BBSI’s reserve bonding to California.
It also raises questions as to whether or not, given years of controversy and statements to the contrary by BBSI, brokers will be willing to place new or renewal coverage with BBSI especially in California’s unregulated and competitive PEO market, and the workers’ comp market in general.
The letter from Moss Adams LLP is prompting an internal investigation and means the filing of the company’s third-quarter financial report with the Securities and Exchange Commission will be delayed.
Workers’ Comp Executive was the first break stories concerning BBSI’s reserve troubles beginning a year ago. Links to those stories appear at the bottom.
The company says Moss Adams sent its audit committee a letter alleging the improprieties. BBSI says the letter also warns that Moss Adams’ interim review of Barrett’s unaudited interim consolidated financial statements as of June 30, 2014 “can no longer be relied upon.”
It is a serious thing when an auditor says this about a publicly traded company because it can affect stock prices and the company’s ability to sell its products. Such statements are not made lightly. BBSI says it sales are up, and it has added significantly more employers that it lost. Barrett officials say they recorded 10.6% same-store sales growth in the third quarter adding 160 new clients during the period.
Barrett says its audit committee hired outside legal counsel to “conduct an independent investigation regarding BBSI’s workers’ compensation reserve for the quarter ended June 30, 2014.” The following quarter is when Barrett reported that it was strengthening its workers’ comp reserves by $80 million and would have to borrow funds to do so.
Barrett says the letter from Moss Adams may have been triggered by Barrett’s replacement of its former independent actuary in October 2014. It says Moss Adams just learned that Barrett had a previous consulting contract for an actuarial analysis with a related entity and that such information was not provided to its auditors.
California regulators are faced with a situation should BBSI’s filed financial data prove inaccurate. The Bureau receives claims data for Barrett’s former and current clients through Barrett’s relationship with the ACE Group and now that data must be questioned. Inaccurate data could affect experience mods for individual employers as well as the comprehensive data upon which rates are based. The Bureau is a private non-governmental organization financially supported by insurance carriers.
Also involved might be Office of Self-Insured Plans who is monitoring the runoff claims from when BBSI’s was self-insured.
The news was released after the stock markets closed for the day. After dropping precipitously last year following the disclosure of its workers’ comp reserve charges, BBSI was recently trading at its highest levels in a year. In after-hours trading, BBSI’s share price fell over 30% following the news of the auditor’s letter and opened this morning down 35%.
Note: No member of the Workers’ Comp Executive staff or management owns or has ever owned BBSI stock.