American Renal Associates Holdings (ARA) has agreed to pay $2 million to settle Securities and Exchange Commission (SEC) charges of accounting fraud allegedly perpetrated by three former financial executives at the dialysis provider.
Former ARA Chief Financial Officer Jonathan Wilcox, Chief Accounting Officer Jason Boucher, and Controller Karen Smith were each charged for their alleged misconduct as part of the scheme, which occurred from January 2017 through at least November 2018, according to the SEC. Wilcox resigned from ARA in September 2018; Boucher was promoted to CFO to replace him, and Smith was elevated to vice president of finance.
Boucher resigned at ARA’s request in March 2019, and Smith followed him in April 2019.
The SEC’s complaint, filed Monday in U.S. District Court for the Southern District of New York, charged ARA and its three former executives with violations of the antifraud, reporting, books and records, and internal accounting control provisions of the federal securities laws. ARA did not admit nor deny the agency’s findings in agreeing to settle.
The SEC further charged Wilcox, Boucher, and Smith with making false statements to auditors. The agency is seeking permanent injunctive relief, disgorgement with prejudgment interest, civil penalties, and officer and director bars against Wilcox, Boucher, and Smith, in addition to reimbursement of bonuses and stock profits from Wilcox and Boucher.
ARA was acquired by private equity firm Nautic Partners in January 2021.
The details: Wilcox had served as CFO at ARA since 2011 prior to his resignation. The company, which partnered with U.S. doctors to develop, own, and operate dialysis clinics as joint ventures, primarily generated revenue through insurance reimbursement for dialysis treatments.
ARA recognized revenue by making an initial estimate of revenue it would receive, then updated the initial estimate after receiving information about the amount the company was actually paid, according to the SEC. The company’s internal controls called for this second step—known as “topside adjustments”—to be based on patient-level payment information.
“Rather than base ARA’s topside adjustments on patient-level data, Wilcox, Boucher, and Smith implemented a fraudulent scheme, in which Wilcox and Boucher agreed on how much overall revenue they wanted ARA to have for a month or quarter, and then Boucher and Smith had staff enter different topside adjustments at specific clinics until this predetermined number was met,” the SEC explained. Targeted financial metrics through this alleged scheme included days sales outstanding and revenue per treatment.
The alleged scheme was continued by Boucher and Smith beyond Wilcox’s departure and hidden from the company’s then-CEO until it ceased shortly after ARA’s audit committee commenced an internal investigation into its revenue recognition methodology and related accounting matters in October 2018.
ARA in March 2019 announced its financial statements and other financial data for 2014 through September 2018 were not prepared in accordance with GAAP and needed to be restated. Its restatements, filed in September 2019, acknowledged the topside adjustment deficiencies, in addition to weaknesses in the company’s internal controls, particularly regarding revenue recognition, journal entry support, and monitoring controls and compliance.
The restatements reflected ARA overstated net income for 2017 by more than $17 million (30 percent) and for the first three quarters of 2018 by more than $22 million (200 percent), according to the SEC.
Wilcox, Boucher, and Smith each received bonuses because of ARA’s inflated metrics, the agency stated. Their alleged actions, along with those of the employees under them acting at their direction, exposed the company to litigation.
Other allegations: ARA’s former audit executives utilized a “cookie jar” tactic, in which a log existed for them to find topside revenue when needed, according to the SEC. Smith and Boucher allegedly made the final decisions regarding which adjustments to book.
The SEC further alleged the executives misled the firm’s auditor regarding their fraudulent practices, including by creating false documents.
“When the audit firm conducted testing of topside journal entries as part of its 2017 audit, ARA, principally through Boucher and Smith, created false and misleading support for many of these journal entries in order to mislead the audit firm that there was, in fact, patient-level support for every adjustment,” according to the agency.