GTT Communications, a provider of telecommunications and internet services, avoided a civil penalty in reaching a settlement with the Securities and Exchange Commission (SEC) addressing alleged disclosure failures over more than a two-year period.
GTT agreed to cease and desist from further violations in reaching settlement, the SEC announced in a press release Monday. The Virginia-based company failed to disclose material information about unsupported adjustments in SEC filings that increased reported operating income by at least 15 percent in three quarters from 2019-20, the agency alleged.
The SEC acknowledged GTT’s prompt self-reporting, extensive remediation, and substantial cooperation in not issuing a fine.
The details: In 2017 and 2018, GTT struggled to integrate data into its operating systems amid rapid acquisition growth, the SEC said in its order.
The failure to properly integrate two key systems—a client management database and a third-party bill processing system—caused “persistent and growing discrepancy” between actual invoices received related to cost of revenue and the company’s expected cost of revenue, the order stated.
Because of these issues, GTT made materially misleading statements and omissions relating to cost of revenue in certain annual, quarterly, and current reports between 2019 and 2020, the SEC alleged.
“By at least mid-2018, GTT knew that it did not have sufficient information systems or resources to record and report [cost of revenue] accurately and fairly following the 2017 and 2018 acquisitions,” the order stated.
Despite this knowledge, GTT failed to implement and maintain policies and procedures designed to provide reasonable assurance that the cost of revenue reflected in its financial statements was based on reasonable support, the SEC alleged.
In December 2020, GTT disclosed its financial statements for the fiscal years ended Dec. 31, 2017-19, and the quarter ended March 31, 2020, could no longer be relied upon.
The company expected to report material weakness in its internal control over financial reporting and that its disclosure controls and procedures were ineffective. It spent tens of millions of dollars to correct its filings but ultimately suspended its efforts, the SEC noted.
GTT and certain of its affiliates filed Chapter 11 bankruptcy cases in October 2021; the company emerged as private in December.
Compliance considerations: Remedial efforts at GTT acknowledged by the SEC included:
- Providing presentations concerning the findings from its internal investigation;
- Identifying key documents and witnesses and promptly making them available;
- Facilitating testimony from former employees;
- Rebuilding its cost of revenue accounts;
- Replacing certain members of management, its board of directors, and its auditor; and
- Overhauling its accounting function, including its policies and procedures relating to cost of revenue.
Company response: “In its order, the SEC acknowledged both the cooperation and efforts GTT has undertaken to bring appropriate diligence to its operations and financial reporting,” a company spokesperson said in an emailed statement. “In addition, since the investigation initiated in 2020, GTT has significantly changed its senior leadership, board of directors, and advisers.”
The company agreed to the settlement without admitting or denying the SEC’s findings.