Flanigan’s Enterprises (BDL), a restaurant and liquor store chain in Florida, acknowledged it’s having difficulty identifying an operating lease from a finance lease. In its latest 10-K, Flanigan’s CEO and CFO concluded the company’s internal controls over financial reporting were effective. However, the very next sentence in the filing contradicts management, revealing a material weakness in Flanigan’s internal controls:

“... related to our effectiveness in distinguishing between an operating lease and a finance lease…”

The control deficiency is related to ASC 842, which requires companies to report lease liabilities and assets on their balance sheet. Flanigan’s says in its annual report it’s working to fix the control deficiency— despite management’s earlier assertion nothing is wrong— but does warn:

“There have been changes in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.”

Though Flanigan’s auditor, Marcum, is not required to express an opinion on the effectiveness of the client’s internal controls, Marcum appears to have given its long-time client a pass on the issue as it determined no critical audit matters exist.

Without explanation, Flanigan’s increased Marcum’s audit fee 30.5% last year. It’s by far the largest increase in the last five years, which includes two years in which Marcum’s audit fee was reduced.

When DuDil contacted Flanigan’s with a finance lease question, CFO Jeffrey Kastner responded promptly and invited us to contact him directly with other questions. We immediately asked for additional information on Flanigan’s ASC 842 issue— specifically whether anything needed to be reconciled or reclassified— as we noted year-over-year increases of 28.9% and 33.4% in operating lease assets and liabilities.

One week later, we have not received a response from Kastner.

Though Kastner’s initial response time impressed, history suggests we should not expect another timely response. Flanigan’s latest annual report was filed late. Last year’s annual report wasn’t filed on time either, nor were two quarterly reports.