Accountant Cites Discrepancies by O.C.’s Aviation
Aviation Distributors Inc.’s former accounting firm said it resigned after discovering that the parts distributor allegedly submitted false sales figures to obtain a bank loan, the company acknowledged.
In documents filed late Monday with the Securities and Exchange Commission, Arthur Andersen LLP alleged that Aviation staff submitted false documentation to Far East National Bank, then supplied inaccurate records to the accounting firm to cover the financial discrepancies.
Additionally, these alleged inconsistencies might have had an impact on Aviation’s 1996 financial statements, which were used to gauge the company’s finances in its initial public stock offering in March.
The documents also show that the accounting firm urged the company, which buys surplus airplane parts for resale to airlines, to fire its chief executive officer, Osamah S. Bakhit.
“[W]e believe that the foregoing matters have occurred with the knowledge and involvement of the highest levels of management in the company,” Arthur Andersen said in a letter to the company late last month.
Aviation Distributors disclosed details of the accounting firm’s allegations in a report filed with the SEC.
The company said in the filing that it is addressing the issues raised by the accounting firm, but did not elaborate.
“The documents provide reasons for our decision,” an Arthur Andersen spokesman said. “In accord with professional standards, it would be inappropriate to discuss the decision beyond the current public filing.”
Aviation staff declined Tuesday to comment on the allegations.
Accounting firms have taken a harder line with the companies they audit, said Brian McGreevy, an industry analyst with the Public Accounting Report, an Atlanta-based independent newsletter.
“They’d rather not take the risk associated with auditing a company where there are disagreements with management or serious questions that arise,” McGreevy said. “But if lawsuits are filed against Aviation for reasons stemming from these allegations, Arthur Andersen may get drawn into the legal morass. Even if they’re not responsible.”
In the SEC filings, Arthur Andersen said a company informant told the Big Six firm on July 24 that Aviation had falsified some of its financial reports.
The next day, accountants met with Aviation officers and began investigating the complaints. Aviation’s own audit committee then joined Andersen’s probe.
“The company appears to have taken action immediately to investigate, and brought in outside management people to help tackle these problems,” said Deborah Wardwell, an industry analyst with Cruttenden Roth Inc., the lead underwriter of Aviation’s stock offering.
“That’s always a good sign that the company wants to clear things up.”
On Aug. 9, Arthur Andersen met with several Aviation officials and reported that it believed the allegations were true, according to the SEC filings.
Last week, Arthur Andersen resigned and withdrew its reports on the company’s financial reports for the last three years. The disclosure prompted Nasdaq officials to halt trading of the company’s stock.
Aviation paid back the Far East National loan about three months ago, said Gordon Olsen, executive vice president of the bank’s Newport Beach branch.
“We’re not aware of any such allegations and did not experience any problems with our dealings with Aviation,” Olsen said.
Incorporated in 1992, Aviation buys airplane parts and redistributes them to airlines around the world. The Irvine company’s clientele includes British Airways and Qantas Airlines.
Aviation, which has a staff of 60, sold about 1.2 million shares, at $5 a share, in its March public offering. The company postponed plans to launch a second offering at Arthur Andersen’s suggestion.
Before the halt in trading, Aviation stock was priced at $12.13 a share, staying close to the company’s high of $13.38 a share.
The company posted second-quarter net income of $608,000, or 20 cents a share, down 21% from the $768,000, or 43 cents a share, for the same period in 1996. Sales increased 45% to $10.3 million, up from $7.1 million.
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Aviation Distributors Inc.
Headquarters: Irvine
CEO/president: Osamah S. Bakhit
Business: Supplies new and used aircraft parts to major airlines worldwide
Employees: 50
Went public: March 4
Exchange: Nasdaq Small Cap Market
Stock Trend (monthly closing prices and last trading date):
Sept. 2: $12.13
Source: Bloomberg News
