In The Matter of William Slater, CPA and Peter E. Williams, III, Administrative Proceeding File No. 3-16381: CEOs And CFOs Are Required to Return Payments From When Company Materially Misstated Financial Results Even if They Did Not Participate In The Fraud
On 10 February 2015, the SEC reached a settlement with two former chief financial officers of Saba Software, Inc., related to materially false financial results that the company reported over a four-year period related to conduct spanning late 2007 until early 2012. The CFOs were required to forfeit approximately $500,000 combined to repay the company their bonuses and profits from sales of the company's stock from the year following the first public issuance or filing with the SEC of each financial reporting misstatement. The SEC explained that the provision of the Sarbanes-Oxley Act at issue here requires these payments even where the officers were not involved in the misconduct at issue.
Saba Software provides cloud-based computer services. Approximately one third of the company's revenue comes from professional services, including customer-facing consultants in North America and Europe and consultants based in India that assist these customer-facing employees at a lower cost. According to the SEC settlement, employees in India billed for professional services in advance of when they were performed in order to accelerate revenue recognition and meet quarterly targets (pre-booking) and both sets of employees failed to report time in excess of what was allotted in order to conceal budget overruns (under-booking). Because of these accounting errors, the company was required to calculate its revenue in a different manner that did not depend on hourly billing and to restate its financial results for 2008 through 2012. These pending restated results, amounting to approximately $70 million total, will show that the company overstated gross revenue and profit by more than 5% annually from 2008 through 2011 and that its inflated revenue sometimes allowed the company to meet quarterly analyst expectations or avoid reporting an annual net loss.
Last year, Saba Software, the two vice presidents that were responsible for the improper accounting practices and the CEO reached settlements with the SEC. The CFOs that reached the current settlement, like the CEO, were required to repay funds even though they were not personally charged with any misconduct because the Sarbanes-Oxley Act requires the CEO and CFO of any issuer that is "required to prepare an accounting restatement due to the material noncompliance of the issuer, as a result of misconduct, with any financial reporting requirement under the securities laws" to reimburse the issuer for the amounts at issue here. According to the SEC, this provision applies to these high-level officers even if they did not participate in the misconduct because the improper activity still occurred "on their watch."
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