Atcon overstated revenue by $35.4M before loan guarantees
Forensic audit shows company had 'systemic approach' to misstate revenue
Miramichi’s Atcon Holding Ltd.’s revenues were overstated by as much as $35.4 million for the year before the former Liberal government offered the company $50-million in taxpayer-funded loan guarantees, according to a forensic audit obtained by CBC News.
The New Brunswick government hired Montreal-based RSM Richter Inc. to perform a forensic audit of Atcon’s finances. The report, dated Nov. 30, 2012, highlights problems across many of Atcon’s various subsidiaries.
The forensic audit says Atcon’s finances had "serious accounting and financial reporting problems" for at least two years before the provincial government handed over the loan guarantees.
"There appears to have been a systematic approach by management to overstate assets, revenues and profits, understate liabilities, expenses and losses," according to the 92-page report, which is marked private and confidential.
The report found that Atcon’s financial statements, which were audited by Grant Thornton, did not meet the industry standards.
RSM Richter indicated its forensic audit took a "conservative approach" to evaluating any financial misstatements.
"Notwithstanding this conservative approach, we estimate that Atcon’s assets and net earnings as at and for the year ended, January 31, 2009, were overstated by an amount ranging from $28.3 [million] to $35.4 [million]," the report said.
The company had included a provision for paying taxes on revenue that had yet to be invoiced. The misstatements of revenue were pegged at $35.7 million to $47.2 million before taxes were subtracted, which brought the figure down to between $28.3 million and $35.4 million.
Robbie Tozer, the former president and chief executive officer of Atcon, did not return a call for an interview.
A spokesperson from Grant Thornton said the firm did not participate in its preparation and does not know of the results. "Therefore it's difficult to comment" on the report, according to an official.
The forensic audit comes roughly two months after CBC News reported how civil servants on the New Brunswick Industrial Development Board warned against awarding the loan guarantees to Atcon.
The board of five deputy ministers reviewed three requests from Atcon Holdings in January, February and March 2009, seeking the three loan guarantees. The civil servants recommended against approving the loan guarantees for Atcon.
The Richter audit points out the New Brunswick government advised Atcon on April 24 the loan guarantees were approved, pending several conditions being met.
Atcon’s auditors completed their 2009 work on May 7, but did not issue the final audit report until June 18 because it was waiting for the finalization of the loan guarantees. The New Brunswick government announced the loan guarantees on June 17.
Forensic audit raises questions
The forensic audit was requested by the provincial government to review Atcon’s financial position at the end of January 2009, which was the year prior to the provincial government handing over the loan guarantees.
The forensic audit examined 13 different areas of Atcon’s business dealings and assessed the possible financial problems.
In the report, it is noted how key Atcon officials did not speak to the auditors.
Among the various subsidiaries, Atcon Plywood Inc. had the highest potential overstatement. The report showed its financial misstatement could have been between $10 million and $17 million because of "impairment of long-lived assets."
There were also problems at some high-profile Atcon projects in western and northern Canada.
The forensic audit estimated Atcon Construction Inc. had nearly $20 million in misstated revenues.
In particular, its Suncor project had an estimated $10.6 million in misstated revenue due to "overstatement" of work in progress and receivables.
Atcon and Suncor had a $54.2-million agreement to construct Highway 63 in Alberta. The forensic audit summarized 10 different concerns it had with the finances of the project.
It also detailed a dispute between Suncor and Atcon over costs — or what were called trends — including a meeting that was intended to avoid a lawsuit.
"Suncor offered $0.3M for [Atcon Construction]’s trends totaling $19.5M, a further sympathy contribution of $1M for the miscellaneous other outstanding trends and if the offer was accepted, it would forgo its potential claim for late delivery. The offer was rejected," the audit said.
Atcon ended up putting a lien on Suncor’s property and claimed it was due $25.4 million on March 19. 2009. The next day, Suncor requested Atcon release all liens and when they were not discharged, Suncor sent Atcon a notice and terminated the contract with Atcon on April 9, 2009.
In another deal, Atcon and Albian Sands Energy Inc. agreed to a $75.2 million contract to remove muskeg over the oil sands in Alberta.
The project was cancelled when the price of oil fell from more than $120 a barrel when the contract was negotiated in the summer of 2008 to $33 by Jan. 31, 2009. Atcon was facing "significant future costs" because of pieces of equipment it had committed to leasing.
Richter said the Albian Sands project’s finances may have been off by $9.1 million. The auditor said the difference surrounded an overstatement of work in progress and how the company expensed its deferred lease payments.
Deh Cho Bridge project
When the provincial government approved the three loan guarantees in 2009, one of the guarantees was specifically to help Atcon finance a steel fabrication centre that would build components for the $135-million Deh Cho Bridge project in the Northwest Territories.
The forensic audit does not show any misstatements of revenue for the project, but it does carry a note that Richter did not take "any provision to reduce the reported margin nor to account for the risks associated with an arbitration process."
The audit did say that as of Jan. 31, 2009, Atcon was "again very much behind in its work."
It also pointed out the gross margin at the time was 28 per cent, which was nearly double what Atcon expected would be the overall gross margin. The auditor said Atcon explained the accelerated profit was because of a deferral of indirect costs that would be expensed later in the project.
By January 2010, the Northwest Territories government had removed Atcon as the main builder in the bridge project.
The contract between Atcon and the territorial government fell apart after the bridge corporation approached Atcon with changes to the bridge's design, as the result of structural problems. The two sides could not agree on the price for the design change and the deal was ended.
The Deh Cho Bridge officially opened on Dec. 1.