Royal Bank of Canada (RBC) will pay $6 million in total penalties to settle charges from the Securities and Exchange Commission (SEC) and two Canadian regulators that it failed to properly record software development costs for more than a decade.
The SEC said in a press release Thursday that RBC applied deficient internal accounting controls to the costs of internally developed software (IDS) from 2008-20. The deficiencies violated the books and records and internal accounting controls provisions of U.S. securities laws.
The Autorité des marchés financiers, which is the regulatory and oversight body for Québec’s financial sector, announced Thursday that RBC would pay 2 million Canadian dollars (U.S. $1.5 million) to settle its charges. The Ontario Securities Commission (OSC) also announced a settlement with RBC for CAD $2 million.
The SEC noted its fine would be offset by penalties RBC paid to the Canadian regulators.
The details: RBC capitalized approximately CAD $658 million (U.S. $482 million) of IDS assets in 2011, which grew to CAD $1.1 billion (U.S. $805 million) by 2021, according to the SEC’s order. As spending on IDS increased, RBC’s “development of its control environment did not keep pace, and internal accounting control deficiencies affected [its] cost capitalization accounting for IDS projects,” the SEC said.
From 2008-16, the bank’s internal accounting systems that developed and assessed the ongoing reasonableness of its capitalization rate estimate were “insufficient” to comply with International Accounting Standards 38 (IAS 38), the order said. Even after RBC implemented capitalization rate studies on IDS projects in 2017, in an attempt to better align with the requirements of IAS 38, those studies were still inadequate, the SEC said.
Compliance considerations: As part of its remediation, RBC instituted additional internal accounting controls and altered its rate study methodology to align with IAS 38 more closely, the SEC said.
In its announcement, the OSC noted it found no evidence RBC’s practices caused harm or losses to investors, nor was there any material impact on RBC’s financial statements.
Bank response: “We are pleased to have resolved this matter, which relates to the capitalization rate applied to our internally developed software costs,” said RBC in an emailed statement. “While it was not large enough to be material to our financial statements, we thoroughly investigated and took action to remediate our processes. We hold ourselves to the highest standards when it comes our financial governance and controls to ensure that we meet or exceed our regulators’ expectations and the expectations we have for ourselves.”
RBC did not admit or deny the SEC’s findings.