It’s not every day that the financial press sings the praises of an independent director, but that’s just what Bloomberg’s Jonathan Weil did on Friday in his column about G. Allen Andreas III, who resigned from the board of Overseas Shipholding Group (“OSG”), a liquid bulk shipping company.

In his resignation letter to Michael Zimmerman, the company’s independent chairman, Mr. Andreas cited “a disagreement with the board as to the process the board is taking in reviewing a tax issue” as the reason for his departure and urged the board to report the issue to the Company’s auditor, PricewatershouseCoopers (“PWC”).

Apparently, the issue that concerned Mr. Andreas was significant, because on October 19 OSG alerted shareholders that the financial statements for 2011, 2010 and 2009, as well as this year’s quarterly filings, are not reliable and may have to be restated. It all results from “a tax issue arising from the fact that the Company is domiciled in the United States and has substantial international operations, and relating to the interpretation of certain provisions contained in the Company’s loan agreements.” In addition, the company said that, in connection with negotiations with creditors, the board is considering a bankruptcy filing.

Today, OSG’s common shares–which traded near $15 earlier this year–are in penny stock territory. And governance-minded shareholders are left to ask if there was any way they could have seen this coming?

The company’s most recent 10-Q, filed in August, gave no signal of accounting issues, as management reported that OSG’s internal controls over the financial reporting process at the end of June 2012 were effective.

On the other hand, OSG’s debt problems were clear in the filing. The company stated that in July 2012 it drew down the last $343 million of a $1.5 billion unsecured revolving credit facility (which expires February 2013) and would have to bridge an estimated $100 million gap between the amounts outstanding under this credit line and the amounts that will be available under another credit facility that would replace it. Options under consideration included: increasing the borrowing capacity; raising debt or equity capital; or selling vessels. OSG then warned that any failure to raise funds would have a material adverse impact on the Company. But there does not appear to be any language related to the tax issues resulting from OSG’s domicile in the United States.
In looking at the board itself, shareholders may question the appropriateness of the presence of Ariel Recanati on the audit committee, which also included Mr. Andreas. Mr. Recanati is the nephew of the company’s deceased founder and his family is the company’s largest shareholder (though the family’s 12% stake is below the 20% threshold at which the NYSE recommends that large holders not sit on the audit committee).

Another worrisome sign regarding OSG’s audit quality was its payment in 2010 of $1.3 million to PWC for tax services. This sum was in addition to the $1.2 million paid for PWC’s services as the outside auditor. These tax fees were paid for services in connection with the Company’s $71.8 million repurchase of publicly listed partnership units of a company-controlled MLP. When management and the auditor enter into significant financial relationships unrelated to the audit, Glass Lewis believes the independence of the auditor and the integrity of the Company’s financial statements may be compromised.
On the compensation front, on June 15 (just one day after the annual shareholder meeting) OSG paid $1.5 million in cash bonuses to its CFO and a senior vice president. The company said the payments were necessary to retain the executives. At the meeting, shareholders approved the board’s request for the authority to grant roughly 1.3 million shares as part of OSG’s equity compensation plan. At the very least, these facts suggest that these executives had little faith in the OSG’s share price at the time (roughly $10).

In hindsight, perhaps the clearest sign that trouble was afoot at OSG was Mr. Andreas’ resignation. Yet the stock barely moved in reaction to the disclosure of his leaving. His letter to Mr. Zimmerman was dated September 27, when the shares closed at $7.05. OSG’s disclosure of the resignation was filed on October 3, when shares closed at $6.82. The next day, OSG shares were slightly higher and they would stay above $6 until October 11.

The shareholders who stood pat following Mr. Andreas’ action are sorry they did. When the company issued the non-reliance warning, shares dropped from $3.25 to $1.25 at close of next trading day.