Capitalized vs. Operating expenses

The easiest way of inflating current year earnings to the detriment of future years is to capitalize cash outlays when they should be expended when they are incurred.

The new financial management at Penn West (TSX: PWT) are looking at the degree as to which this has permeated into the balance sheet of the corporation.

The numbers are not extreme, but a change of 20 cents per share on the income statement is significant. There will likely be some sort of re-statement issued at the end of this process that will take a non-cash hit on equity.

Just strictly from a balance sheet perspective this looks like a deep value play, especially if your prognostication on crude believes that prices will rise. Companies like this are not my thing, but this recent accounting crisis has put the value of the firm clearly in low territory.

This is also another indication of how corporate auditors are not as comprehensive as one would believe. In an ideal world, they would be held accountable in addition to the (no longer working with the company) staff that transacted the questionable journal entries.