A healthcare services company, its former CFO and the company's controller settled SEC charges for accounting and disclosure violations that led the company to report inaccurately high net income and earnings per share ("EPS"). This is the SEC's third action arising from the Division of Enforcement's EPS Initiative, which identifies through the use of "risk-based analytics" potential accounting and disclosure violations resulting from, among other things, earnings management practices.
According to the Order, in 2014 and 2015 the company failed to adequately accrue for or disclose loss contingencies related to a series of pending and settled wage-and-hour labor law cases filed on behalf of the company's employees against the company, as required by U.S. Generally Accepted Accounting Principles. The SEC stated this allowed the company to report record-high EPS for this time period that matched, or were very close to matching, research analysts' consensus EPS estimates.
The SEC found that the company's CFO did not direct the accrual for and disclosure of the loss contingencies in a timely manner despite knowing that the settlements and the company's intention to settle pending cases were "probable and reasonably estimable." According to the findings, when the company eventually accrued for the loss contingencies, it reported net losses, losses per share and EPS that were significantly lower than consensus estimates.
In addition, the SEC found that during the Q3 2015 closing process, the company's controller failed to ensure that there was sufficient supporting documentation for the company's reduction of legal and accounting fee expenses. Further, the SEC stated that the controller manually recorded inappropriate miscellaneous expenses in a journal entry. The SEC determined that the company's failures were due, in part, to its inadequate internal controls with respect to (i) accruals for loss contingencies in connection with litigation, (ii) manual journal recordings, (iii) expense adjustments made during the quarterly closing process and (iv) financial reporting inaccuracies.
As a result of its findings, the SEC determined that the CFO violated Securities Act Section 17(a) ("Use of interstate commerce for purpose of fraud or deceit") and SEA Rule 13b2-1 ("Falsification of accounting records"), and caused the company to violate Securities Act Sections 17(a)(2) and 17(a)(3), Exchange Act Sections 13(a) ("Reports by issuer of security; contents") and 13(b) ("Form of report; books, records, and internal accounting; directives"), and SEA Rules 12b-20 ("Additional information"), 13a-1 ("Requirements of annual reports"), 13a-11 ("Current reports on Form 8-K"), 13a-13 ("Quarterly reports on Form 10-Q") and 13a-15 ("Controls and Procedures"). In addition, the SEC found the controller caused the company to violate Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B).
To settle the charges, the company, former CFO and the company controller agreed to (i) cease and desist from further violations and (ii) $6 million, $50,000 and $10,000 in civil money penalties, respectively. The CFO also agreed to a suspension from appearing or practicing as an accountant before the SEC, but will be allowed to apply for reinstatement two years following the suspension.
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