ESCO Overstates Sales by $2.4 Million, Fires Auditor After Revenue Recognition Warning

We’ve also uncovered a $35,000 audit fee discrepancy that casts additional doubt over the company’s internal controls.

January 5, 2022

Eleven days after ESCO Technologies (ESE), an engineered products firm, fired its long-time auditor KPMG, the company disclosed a control deficiency that resulted in misstated financials. In its latest 10-K, ESCO acknowledged the design of certain controls over revenue recognition and the accumulation of inventory costs and the determination of inventory carrying values were ineffective in 2020:

“The control deficiencies resulted in immaterial misstatements of net sales and cost of sales.”

ESCO overstated $2.4 million of net sales and contract assets, $900k of inventory, and understated COGS by the same amount. The errors— after adjusting for taxes and other errors— resulted in a decrease in net income of $2.5 million, or $0.10 per share for 2020.

The day before KPMG— ESCO’s auditor for 31-years— was notified it was being dismissed, director Larry Solley announced he would resign from ESCO’s Board of Directors. On the same day, ESCO eliminated Solley’s board seat, reducing the number of directors to seven. The company also awarded its executive officers a lucrative new performance bonus scheme.

Separately, revenue and inventory aren’t the only items ESCO struggles to report accurately at times. We’ve uncovered a discrepancy in the amount ESCO paid KPMG the year before the auditor was ousted. Even with a clarifying footnote in the latest Proxy, ESCO’s audit fee math does not add up.

The 2020 Proxy indicates KPM was paid $1.275 million yet the 2021 Proxy indicates KPMG was paid $1.57 million the prior year. In a footnote, ESCO tries to explain away the apparent discrepancy, noting the company approved an additional $260,0000 to KPMG after the 2020 Proxy was filed.

The numbers still don’t sum.

If we add the additional payment to the total disclosed in the 2020 Proxy, KPMG’s total for 2020 should be $1.535 million, or $35,000 less than the $1.57 million ESCO reports in the 2021 Proxy. It’s not the first time EXCO has generously paid KPMG hundreds of thousands of dollars extra after the filing of a Proxy, but in those instances the adjustments reconcile with the prior year.

When DuDil contacted ESCO about the discrepancy, the company told us it paid KPMG an extra $35,000 for a statutory audit in Finland. Though ESCO includes a general mention of statutory audits for foreign subsidiaries in a footnote, neither the Finland audit nor the additional $35,000 payment is disclosed in either the 2020 or 2021 Proxies which still do not reconcile.

Related: PH, PLL, TDG, MOG.A, SAFRY,

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