Penn West Exploration

Penn West Exploration

References

-By Rebecca, Vasundhara, and Lauren

Role of Technology

https://www.google.ca/amp/business.financialpost.com/news/energy/penn-west-petroleum-ltd-investigates-accounting-irregularities-that-stretch-back-four-years/amp

http://www.ifrs.org/IFRSs/Pages/IFRS.aspx

http://www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/canadian-energy-giant-penn-west-reveals-accounting-irregularities/article19841550/

http://business.financialpost.com/news/energy/rocked-by-accounting-scandal-penn-west-has-now-turned-the-corner-ceo-says

http://www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/penn-west-may-face-lawsuits-after-alleged-accounting-irregularities/article19844808/

http://business.financialpost.com/news/energy/penn-west-petroleum-ltd-investigates-accounting-irregularities-that-stretch-back-four-years

https://prezi.com/f4v_m9-va7kg/penn-west-accounting-scandal/

http://www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/penn-west-petroleum-plagued-by-many-problems/article20165751/

http://business.financialpost.com/news/energy/rocked-by-accounting-scandal-penn-west-has-now-turned-the-corner-ceo-says

http://www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/penn-west-board-faces-allegations-of-stock-option-manipulation/article18978771/

http://www.pennwest.com/about/corporate-information

http://www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/penn-west-may-face-lawsuits-after-alleged-accounting-irregularities/article19844808/

https://en.wikipedia.org/wiki/Penn_West_Exploration#Accounting_irregularities

http://www.theglobeandmail.com/globe-investor/investment-ideas/treating-money-as-a-best-friend/article4260325/

https://ca.finance.yahoo.com/quote/PWT.TO?ltr=1

• Improved organization, communication, searchability, efficiency
• Large media coverage --> pressure to make improvements and work through errors
• Accounting software to develop financial statements, internal control for auditors, helps keep track of source documents and historical data (that are unreliable)

Key Officers Involved

Penn West Exploration

• David Dyck: newly appointed CFO
• Rick George: CEO during time of scandal
• David Roberts: President & CEO, helped enforce new operation plans
• Murray Edwards: significant shareholder, oil patch financier

Key Stakeholders

2014

• Founded in 1979 in Calgary, Alberta
• Oil and natural gas production and exploration company
• Very large business in Canada
• Was the largest energy trust on the continent
• Penn West Petroleum Ltd. -->→ Penn West Energy Trust --> Penn West Exploration
• Now worth $5 billion

Fallout of Company

Overview of Scandal

• Investors/Shareholders: lost money (stock prices dropped), too risky to invest
• Employees: more than 50% lost their jobs, or working for a company with a bad reputation
• Government: economic losses, large population lost jobs, must create stricter regulations
• Banks: violated terms of loan agreements
• Society: Betrayal of trust

2012

• David Lester, one of the investors who sued Penn West

• $400 million class action law suits
• $500 million in damages from shareholders and investors
• Shares lost 93% of their value in past decade
• Loss of profit: $15 million loss vs $34 million gain in previous year
• Restating financial results would violate terms from bank loans and other notes
• Sold assets to resolve debt
• Previous financial statements are unreliable

• David Dyck discovered and reported accounting irregularities
• Informed security regulators in Canada and United States
• Alberta Securities Commission
• United States Securities and Exchange Commission
• Operating costs appeared smaller than they actually were
• Operating expenses were categorized as capital expenses
• Overstated net income, influenced stock prices and cash flow
• Identities of the employees responsible were not disclosed, but they were fired

What if I report this?

Cons

Pros

• Maintain transparency in business
• Not go to jail for not reporting
• Investigation will allow managerial improvements

GAAPs manipulation

• Law suits
• Employees will lose jobs
• Ruin company reputation with investors
• Will complicate things in the company

Actions Taken

• The Matching Principle
• Objectivity Principle
• Full Disclosure Principle
• Principle of Conservatism
• Materiality Principle

What if I keep it secret?

Pros

Cons

• 3 independent auditors from KPMG investigated the books from 2007-2014
• Found $381 million total misclassified operating expenses from 2012-2013
• Investors hammered stock prices
• Investigated reason for misclassification and how it was allowed
• Gray areas of classification
• Former CFO blamed it on different accounting interpretations

Would IFRS have helped?

Roles: CPA, OSC, CRA

Different Paths They Could Have Taken

• Would not have to deal with law suits
• Prevent tarnished reputation
• Easier option
• People will not lose jobs

• No investigation
• Won't know who is responsible
• If I ever get caught not reporting this, I may go to jail

• Minor role in scandal
• CFO decided to take responsibility
• Republish financial statements
• Stock price plummet
• Possibilities of their role:
• CPA: fine workers, order additional training, remove professional certification
• OSC: investigate, fine, suspend trading
• CRA: audit financial statements, impose fine/penalty of interest plus taxes owed

• Compare actual to budgeted revenues and expenses regularly
• Document approval of financial procedures and policies of large purchases/costs
• Better internal controls to manage source documents
• A big issue was that there were not enough source documents to support or validate the classifications (objectivity)

• IFRS is responsible for setting rules/standards
• Penn West's careless disregards for these standards caused the company's downfall
• Consequences to not following IFRS:
• Damaged reputation
• Fined by OSC
• Sued by investors
• Stock price drop

Reason for Scandal

• Debt due to poor and inefficient operations
• Drilling costs were almost double industry average
• Difficult to sell assets to pay off debt
• This is their second accounting scandal
• Have manipulated stock prices before