goeasy stock falls after short report alleges accounting manipulation

Investing.com -- Shares of goeasy Ltd (TSX: GSY) dropped 3% on Monday following a critical short report from Jehoshaphat Research that accused the Canadian subprime lender of using aggressive accounting practices to inflate earnings.

The short seller alleges that goeasy has employed various accounting "shenanigans" to artificially improve its financial metrics, including charge-offs, delinquencies, operating expenses, and return on equity. According to Jehoshaphat Research, these practices have inflated pre-tax earnings by "hundreds of millions of dollars" and delayed approximately $300 million in charge-offs that could materialize in coming quarters.

Among the specific allegations, the report claims goeasy changed its policy on charging off delinquent car loans, no longer doing so at 180 days past due, which immediately improved reported charge-off numbers. The short seller also accuses the company of reclassifying about 8% of its loan book into a lower-risk category despite no apparent change in credit scores.

Jehoshaphat Research further pointed to an "explosion" in unpaid interest receivable as evidence of borrower stress that contrasts with the company’s reported past due rates. The report suggests that after accounting for these alleged irregularities, goeasy’s business "isn’t even earning its cost of capital."

The short seller also highlighted recent executive departures, noting that both the CFO and former CEO pursued "unusual stock sales" before their exits. The report mentioned that goeasy appears to have paused its share buyback program since mid-April, potentially due to overextended debt levels.

Despite these allegations, the report acknowledged that eight out of nine analysts covering goeasy maintain "Buy" ratings on the stock.

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