A China-based technology company won’t pay a fine in settling with the Securities and Exchange Commission (SEC) over an alleged accounting fraud scheme perpetrated by two of its former senior managers.
Cloopen Group Holding, a provider of cloud communications products and services, dodged a potential penalty from the SEC for violations that included running afoul of reporting, recordkeeping, and internal control provisions of the federal securities laws, the agency announced Tuesday.
In October, Cloopen announced it received its final delisting determination from the New York Stock Exchange (NYSE) after failing to timely file certain of its annual reports for years impacted by the alleged fraud scheme.
The details: From May 2021 through February 2022, the former operating management director and a former department head at Cloopen “orchestrated a fraudulent scheme to prematurely recognize revenue on service contracts for which Cloopen had either not completed work or, in some instances, not even started work,” the SEC said in its order.
The alleged scheme began months after Cloopen first went public on the NYSE and was spurred by quarterly sales goal targets as part of a new performance evaluation system at the company, per the order.
The accounting irregularities were first identified by an external auditor and confirmed by an internal investigation. The probe determined the company overstated revenue by $1.8 million for the second quarter of 2021 and $2.8 million for the third quarter of 2021, among other findings.
Compliance considerations: Cloopen self-reported the findings of the external auditor to the SEC, “within a few days of retaining outside counsel to conduct an internal investigation and before any significant steps had been taken as part of that investigation,” the agency said.
The company substantially cooperated with the SEC’s investigation, the agency said, and took remedial actions including:
- Forming an independent board committee to investigate the issues uncovered by the external auditor;
- Terminating the senior managers responsible for the alleged scheme, disciplining other employees involved, and reorganizing or removing departments involved;
- Strengthening its internal accounting controls for customer contracts, payments, and revenue recognition;
- Recruiting finance and accounting personnel with expertise in U.S. generally accepted accounting principles; and
- Clawing back bonuses paid to the company’s chief executive and chief financial officer.
“This enforcement action demonstrates what we have said repeatedly: There are real benefits to companies that self-report their potential securities law violations, assist during our investigations, and undertake remedial measures,” said Gurbir Grewal, director of the SEC’s Division of Enforcement, in the agency’s release.
Company response: “The settlement indicates our cooperation and remedial efforts during the process, as well as our continued commitment to improving our internal controls,” said Cloopen Chief Executive Changxun Sun in a statement. “Going forward, we will focus more on our business and future developments and continue to create value for our customers and shareholders.”
Editor’s note: This story was updated Feb. 8 to include a response statement from Cloopen.