An international accounting firm will pay $6.2 million in fines for mishandling an audit of a former Cook Inlet oil and gas company that had improperly inflated the value of its oil field assets by hundreds of millions of dollars, according to financial regulators.
The payment from KPMG will settle charges brought by the Securities and Exchange Commission after KPMG's audit failed to address facts that raised "serious doubts" about the overvaluation of Miller Energy Resources and its Cook Inlet assets, the agency said Tuesday.
Miller Energy, of Knoxville, Tennessee, was charged with accounting fraud in 2015 related to the overvalued assets. The company paid $5 million to the SEC to settle the charges.
Miller Energy filed for bankruptcy in 2015, along with subsidiaries such as Cook Inlet Energy. Cook Inlet Energy continues to operate in Alaska after the companies acquired new owners during the bankruptcy proceedings. Miller Energy is now Glacier Oil and Gas.
Cook Inlet Energy received more than $23 million in cash payments for tax credits from Alaska in 2015 and 2016 as part of the state's former program to encourage oil and gas exploration.
Miller Energy in 2009 acquired the Cook Inlet assets, including five operating oil and gas wells and the offshore Osprey Platform, for an estimated $4.5 million. Miller Energy's 2010 financial statements "grossly overstated" the value of the assets, boosting their estimated value to $480 million, the SEC said.
The overvaluation helped turn the penny-stock company into one that eventually listed on the New York Stock Exchange, with stock value in 2013 reaching nearly $9 per share, the SEC said in 2015. But investors were misinformed about the company's value because of KPMG's bungled audit.
In calculating the higher value, Miller Energy had improperly relied on an oil and gas reserves report. It also erroneously double-counted much of the value of its fixed assets, the SEC said.
KPMG, and John Riordan, the managing partner at KPMG's office in Knoxville, did not "appropriately consider" the facts surrounding Miller's acquisition of the Cook Inlet assets, the agency said. They also failed to catch the double-counting of assets in the company's valuation reports. Riordan agreed to pay a $25,000 penalty and is suspended from practicing before the SEC as an accountant.
"KPMG retained a new client and failed to grasp how it valued oil and gas properties, resulting in investors being misinformed that properties purchased for less than $5 million were worth a half-billion dollars," said Walter Jospin, director of the SEC's Atlanta Regional Office.