Earlier this year, tiny Top Tankers (NASDAQ:TOPT) had announced it was selling off its fleet of ships and then immediately leasing them back. While I had remarked that it seemed a strange course of action, the market disagreed and pumped up its stock 20% that day, agreeing with the company's explanation that it was just trying to maximize the prices such ships were fetching.

Back then the stock was sailing high at around $17, and the company paid a special dividend of $5 per share from the proceeds of the sale -- along with a second special dividend of $2.50 per share later that month. Heady times indeed for a firm which competes against industry leaders TeekayShipping (NYSE:TK) and Overseas Shipholding (NYSE:OSG) in carrying petroleum for the big oil companies like Shell, Chevron (NYSE:CVX), and ExxonMobil (NYSE:XOM).

But that was about as good as it got for Top Tankers. Fast forward to today and the stock has sunk to $5; it's regularly selling off more ships in all classes; and just the other day its auditors resigned in a dispute over the accounting treatment of that previous sale-leaseback scheme. Funny thing is, after Ernst & Young resigned, the company announced that it would handle the transactions the way the auditor recommended, which means it will have to restate results for the first and second quarters of the year, while also reducing net income by $0.02 and $0.09 per share, respectively. You might rightly ask why the company didn't go along with its auditors in the first place and save itself the embarrassment.

While Top Tankers didn't reveal much about the discrepancy with the auditors, I would hazard a guess that the dispute centers on accounting for the sale-leaseback as an investing transaction on the cash flow statement rather than as a financing transaction. What's the big deal?

While the accounting rules are apparently fuzzy on the issue, experts say the transactions should be more appropriately viewed as a financing event because you're using an underproductive asset to raise capital. You're giving up ownership of the asset to raise money, just like issuing equity or debt. When the transaction is considered an investing event, however, it can misrepresent a company's cash flow statement, even though it's not illegal and there may be no overt or conscious effort on management's part to do so.

When a company sells an asset outright, it no longer has use of that asset and its capacity to productively produce shrinks. It can use the gains realized from the sale to offset capital expenditures, thus increasing its free cash flow. But when a company sells the asset and then leases it right back, it not only gets the proceeds from the sale, it also retains the use of the asset and boosts its free cash flow. It also moves the costs associated with the operating lease off a company's balance sheet and into the footnotes.

Looking at Top Tankers' cash flow statement, you see that it has treated the leaseback agreement as an investing event, the leases are viewed as operating leases, and the costs associated with it are noted in the footnotes. As a result, it was able to boost its net income for the quarters in question, but now it will have to restate them.

Yet I'm wondering why Top Tankers is stopping at just the first and second quarters with its restatement. While the first two quarters saw a large number of boats in its fleet sold and leased back, it had at least five similar transactions the year before. Perhaps it's just not meaningful enough to fix those smaller numbers because the company said it didn't affect prior years' statements.

But it was significant enough to push back its earnings release to the beginning of December. Then we'll find out (perhaps) exactly what the discrepancy is and why it caused Top Tankers' auditor to resign.

You can lease these related Foolish articles at no cost:

Does Top Tankers have what it takes to shed that sinking feeling? Investors don't think so. Motley Fool CAPS , the new investor intelligence community at the Motley Fool, has given it a one-star rating. Why not give your opinion?

Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.