Evoqua Water Technologies to pay $8.5M for alleged revenue inflation

The SEC announced Monday it charged Evoqua Water Technologies Corp. and a former company finance director, Imran Parekh, with improper accounting practices in the firm’s 2017 and 2018 filings with the agency.

The details: The SEC alleged Parekh, as finance director of Rhode Island-based acquisition Neptune Benson, inflated revenues by nearly $12 million for fiscal year 2017 as Evoqua was preparing to go public.

Parekh used an accounting trick—including uncompleted sales in revenue—to make it appear Evoqua had earned more revenue, according to the agency. The company allegedly made the misstatements in its registration statement and its initial public offering prospectus filed with the SEC in October and November 2017.

“[T]he misconduct continued through Evoqua’s first year as a public company, resulting in inaccurate books and records and material misstatements of Evoqua’s financial condition in subsequent filings with the commission,” the SEC said. “… Evoqua misled investors and potential investors about the true financial picture of the company.”

Compliance ramifications: Evoqua’s compliance department was made aware of Parekh’s alleged actions through a hotline report in 2016. The company’s investigation concluded in March 2017 found evidence of documentation inconsistencies, according to the SEC’s complaint.

“Despite the findings from the internal investigation, Evoqua failed to acknowledge that it had erroneously recognized revenue from these transactions, evaluate whether the errors were material, or assess whether the identified documentation deficiencies and discrepancies from 2016 also impacted the first half of fiscal 2017,” the agency said. “Instead, the company continued to improperly recognize revenue during fiscal 2017.”

Parekh left the company in August 2018. Evoqua acknowledged in its FY2018 annual filing it identified control deficiencies related to revenue recognition but did not address then the misstatements in its previous financial results, according to the SEC.

The company’s final agreement will spell out steps it must take to improve its system of internal accounting controls, the SEC said.

The court will decide if Parekh should be barred from serving as an officer or director of a public company. Parekh agreed to pay disgorgement, prejudgment interest, and a penalty, the amounts of which will be decided in the future.

Evoqua response: “Evoqua made a business decision to enter into this settlement, on a non-admit, non-deny basis, with the SEC based on its strong desire to put this matter behind the company so that it can better focus its attention on its current business activities,” the company said in an emailed statement. “The firm has and continues to have a long-standing policy of cooperating with its regulators and cooperated with the SEC staff in this matter as well.”