An acquisition from last year reverberates into Heartland's auditor dismissal

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The recent dismissal of its auditor by Heartland Express, over an issue that ties back to its July acquisition of Interstate Distributor, is not rare, but it is infrequent.

Earlier this month, a subcommittee of Heartland’s directors approved the dismissal of KPMG as its auditor. In a filing with the Securities & Exchange Commission, Heartland said the KPMG end-2017 report “indicates” that Heartland hadn’t maintained “effective internal control over financial reporting.” The reason: there were “material weaknesses” in several aspects of the company’s financial reporting, including communication regarding the objectives of internal control.

But more significantly, the “material weaknesses” led to “ineffective controls over the allocation of the purchase price for Interstate Distributor Do. to the assets acquired and liabilities assumed.”

Heartland acquired Interstate Distributor last July for $113 million from Saltchuk Resources. At the time, Heartland estimated that the IDC business generated revenue of about $325 million in 2016.

In a Power Point presentation that accompanied the acquisition, Heartland executives said the acquisition consisted of $94 million in cash for equity, assumed debt of $23 million, and $4 million in acquired cash. It also said in that presentation that IDC had an unspecified operating loss in 2016.

KPMG had been Heartland’s auditor since 2016. Grant Thornton was hired to replace KPMG.

Nate Newton, an assistant professor at the Trulaske School of Business at the University of Missouri, who has written about the relationship between companies and their accounting firms, reviewed data on the frequency of auditor dismissals.

“Among large companies like Heartland that received an audit opinion on internal controls for years ending between January and December 2016, 3.2 percent switched auditors within one year of the auditor’s opinion,” Newton wrote in an email to Freightwaves. But beyond that:

  • If the auditor reported a material weakness, as KMPG did for Heartland, 12.7% switched auditors within a year.
  • If there was no such finding of a material weakness, only 2.5% of companies switched auditors within a year.
  • The number of companies that received a report of a material weakness was 6.3%.
  • “These frequencies indicate that in general, companies are more likely to switch auditors after the auditor reports a material weakness,” Newton wrote.

At the time of the acquisition, Heartland said in its announcement that the “purchase accounting remains ongoing.” Specifically, it said that the “carrying values of the physical assets could be reduced versus the values previously recorded by IDC due to shorter useful lives.” 

In its fourth quarter earnings statement, Heartland’s comments on IDC were far from positive. After reviewing several changes undertaken by the company as it sought to integrate IDC, the statement said the steps “created a headwind of lower revenue and lower profit during the quarter but we believe this will provide for improved cost structure and overall operating improvements in the near future as these services and past operating decisions resulted in operating losses at IDC or profit margins far below our expected levels of operation. “