Penn West Petroleum Securities Enforcement Case: A Budget for Moving the Costs

In the Penn West Petroleum securities enforcement case, the SEC alleged that the oil producer moved operating costs into capital accounts, reducing reported operating costs by as much as 20% in certain periods. If you prepared cost reports or questioned a month-end adjustment, the complaint describes a familiar place to look: the difference between the work in the field and the number accounting sent to investors.

Penn West, later renamed Obsidian Energy, operated from Calgary, Alberta, and its shares traded in Toronto and New York during the period covered by the allegations. This page follows the SEC’s case against the company and three former finance executives, including the internal instructions and warnings. Our broader page on supplier rebates and expense capitalization compares the ways companies can make costs disappear from reported results.

Penn West’s Operating Cost Per Barrel Was the Selling Point

Operating expense per barrel of oil equivalent told investors how much Penn West spent extracting and processing its production. The SEC complaint explains why analysts watched it: oil and gas prices came from the market, while controlling production costs could distinguish one producer from another. Penn West had struggled to keep those costs down.

The complaint alleged that accounting adjustments gave investors a different account of that struggle. Moving costs out of operating expenses improved the operating measure even though the underlying work had not become cheaper.

Penn West used International Financial Reporting Standards. As the complaint explains, production expenses generally reduced current income, while qualifying expenditures extending an asset’s useful life could be recorded as capital assets. That distinction depended on the expenditure and the work it paid for. The alleged reclassifications followed the desired result instead.

The Capitalization Budget Came Before the Projects

The SEC alleged that Penn West’s former chief financial officer and vice president of accounting and reporting set an annual target for moving operating expenses into capital accounts. The operations controller then directed accounting staff to make entries as needed to bring the operating-cost measure into line. The complaint says production personnel had little meaningful input into a target supposedly concerned with repair and maintenance work.

The complaint quotes an internal planning email that separated Canadian $20 million in real projected cost savings from Canadian $85 million in planned capitalization for 2013. We call that cost control by journal entry.

The SEC alleged that staff booked large, round adjustments and spread many of them across operating groups in proportion, instead of tying them to specific projects. At the year’s close, the controller allegedly directed a Canadian $7,921,218 entry, exactly the amount remaining in the capitalization budget. An internal table tracked the amount used and the amount left.

The complaint also quoted an earlier email from the operations controller about which costs should remain in capital accounts. The sentence put the external auditor inside the calculation:

The Royalty Account Took Costs Nobody Owed in Royalties

The SEC alleged a second way of lowering operating expenses: moving them into royalty accounts. Penn West called this practice reclass to royalty, also known internally as UOCR. Those accounts represented payments to provincial governments and other owners of mineral rights where the company drilled.

The complaint describes a gas cost allowance that reduced royalties Penn West actually owed in Alberta. According to the SEC, the company then moved an equivalent amount of operating expenses into a royalty account, even though those additional royalties were neither owed nor paid. It also alleged improper reclassification of oil-production costs into royalties. The result presented to investors was lower operating expense and higher royalty expense.

The monthly reporting packets made the effect visible inside the company. The complaint describes a table showing the unadjusted operating expense per barrel, the capitalization adjustment, the royalty adjustment and the reported result. For an accounting insider, those versions connect the cost incurred to the story management chose to publish.

Excess Accruals Supplied Another Reduction

The SEC alleged that Penn West also carried excess expense accruals into later periods and released them when it wanted lower reported operating costs. The company called the practice accrual softening. Penn West’s accounting required expenses to be recorded when incurred, and excess accruals to be reversed at the end of the accounting period.

According to the complaint, management used the excess amounts to cancel out real operating expenses in later months. When much of the capitalization target had already been used, releases of excess accruals allowed earlier capitalization entries to be reversed and the resulting room reused later in the year.

The complaint describes a forecast spreadsheet that divided excess accruals across future months. That gave an insider a specific comparison: the expense estimate, the reason it was no longer needed, and the schedule management selected for releasing it.

The Accounting Staff Asked for Support

Penn West’s accounting staff repeatedly questioned entries that lacked supporting records, according to the SEC. The manager of operations analysis raised concerns with the vice president of accounting and reporting and the operations controller. After a request for a list of capitalized repair and maintenance projects, the controller allegedly acknowledged that no such list existed.

The complaint describes a journal-entry procedure requiring invoices, explanatory memos, spreadsheet analyses or similar support, attached in the accounting system for review. Another accounting employee had to approve the entry. The SEC alleged that unsupported reclassifications nevertheless received approval at the controller’s direction.

The internal controls group also tested the procedure and found missing support in nearly one-third of its sampled entries. According to the complaint, it reported the finding to the chief financial officer and vice president, who failed to correct the problem.

In March 2014, the manager of operations analysis objected to another adjustment. The manager’s email, quoted in the SEC complaint, explained exactly what accounting staff were being asked to do:

A New Finance Team Took the Warning to the Audit Committee

The complaint says the incoming chief financial officer acted when the manager of operations analysis raised the concerns in June 2014. He reported them to the new chief executive officer and the audit committee, which began an internal review with independent assistance.

Penn West restated its financial statements for 2012, 2013 and the first quarter of 2014. In the company’s disclosures quoted by the SEC, Penn West acknowledged that the accounting practices lacked support and needed adjustment. It also acknowledged that little analysis had been performed when entries were made to determine which expenses belonged in capital accounts.

The SEC brought its civil action against Penn West and the former chief financial officer, vice president of accounting and reporting, and operations controller. The controller agreed to settle, according to the SEC’s announcement.

What Evidence Is Needed for Whistleblowing?

For expense capitalization, useful securities fraud evidence connects the original operating cost, the instruction to move it, the supporting work and the result investors received. Penn West’s complaint makes each connection concrete through journal entries, monthly accounting packets, budget targets, project requests and internal warnings. We work with you on how the part you know fits those decisions.

An operations employee may understand the work behind the cost, while an accounting employee may understand why its classification changed. Someone who raised a concern may know what management did with it.

A finding in The Significance of Whistleblowing as an Anti-Fraud Measure, published in the Journal of Forensic & Investigative Accounting in 2018, helps explain the value of those different vantage points. The study of occupational fraud found whistleblower detection more likely as more people participated in a scheme. In Penn West’s case, the SEC complaint shows why the person asked to post an entry could understand something the published operating measure concealed.

An SEC whistleblower can earn 10% to 30% of sanctions collected in an enforcement action with more than $1 million in monetary sanctions. We assess the connection between your information and a potential SEC whistleblower award alongside the accounting issue itself.

If your knowledge also concerns false claims against government money, we assess it with you. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

You Know What the Entry Was Supposed to Fix

If the instruction you received was to fix the reported cost without changing the work behind it, talk with our whistleblower experts about that instruction. We build the case with you around the entries, the operational facts and the people who approved them, bringing in securities fraud whistleblower lawyers who understand public-company accounting. We stay beside you as your knowledge of the business becomes a case the evidence can support.