SEC fines Healthcare Services Group $6M over contingency reporting lapses

Healthcare Services Group (HCSG) was penalized Tuesday under a relatively new SEC initiative that utilizes risk-based data analytics to uncover potential accounting violations regarding earnings per share (EPS) reporting. The company’s chief financial officer and controller also agreed to civil penalties as part of the case.

The details: HCSG was the subject of more than a dozen lawsuits in 2013 alleging violations of labor laws. Over the course of 2014 and 2015, the company failed to timely accrue for and disclose material loss contingencies related to the settlements of these lawsuits as required by GAAP, according to the SEC’s order.

HCSG CFO John Shea was deemed responsible for these alleged violations, as he was aware of the company’s legal expenses and increased exposure yet failed to accrue for the loss contingencies over the course of multiple quarterly filings. This led to the company meeting research analyst consensus EPS estimates when it should have been below the mark—an inaccurate reflection of HCSG’s performance.

“HCSG repeatedly failed to record loss contingencies related to litigation settlements despite mounting evidence that such liability was probable and reasonably estimable, while misleading investors by reporting inflated net income and consistent EPS growth,” said Anita Bandy, associate director of the SEC’s Division of Enforcement, in a press release. “It is critical for public companies to ensure that accounting judgments, including those involving loss contingencies, are not being used to manage earnings and distort financial statements.”

Derya Warner, HCSG’s controller, was also found by the SEC to have made a series of inadequately documented accounting entries, including inventory expenses, accounting fees, rebate payments, and compensation related to manager bonuses. Overall, the company was faulted for lacking sufficient internal accounting controls to prevent the alleged lapses.

“HCSG’s internal accounting controls were not designed or maintained to provide reasonable assurance that HCSG’s financial statements would be presented in conformity with GAAP, and it further failed to maintain internal control over financial reporting,” the SEC stated.

Individual liability: Shea agreed to pay $50,000 in addition to being suspended from appearing or practicing before the SEC as an accountant for two years. Warner was fined $10,000.

HCSG, Shea, and Warner neither admitted nor denied the SEC’s findings.

“This settlement reflects our cooperation in working with the SEC to conclude this matter and enables us to continue with the execution of our operational and growth strategies,” said HCSG CEO Ted Wahl in a statement. “The Company’s Board of Directors and management team remain committed to maintaining strong internal controls and adhering to best practices for compliance and corporate governance. We are pleased to put this matter behind us.”

Shea, who had served as the company’s CFO since 2012, will transition to a chief administrative officer role beginning Sept. 1.

Compliance takeaway: “As today’s actions demonstrate, we will continue to leverage our in-house data analytic capabilities to identify improper accounting and disclosure practices that mask volatility in financial performance, and continue to hold public companies and their executives accountable for their violations,” stated SEC Enforcement Director Gurbir Grewal.