SEC issues ‘highest penalty to date’ in data analytics case

Rollins, a pest control services provider, and the company’s then-chief financial officer, Paul Edward Northen, agreed to pay civil penalties of $8 million and $100,000, respectively, to settle charges that unsupported reductions to the company’s accounting reserves were made in amounts sufficient to allow the company to round up reported EPS to the next penny.

“This is the fourth action, and the highest penalty to date, against an issuer in connection with the Division of Enforcement’s highly successful and continuing EPS Initiative, which uses data analytics to uncover hard-to-detect accounting and disclosure violations by public companies,” stated Gurbir Grewal, director of the SEC’s Division of Enforcement, in a press release.

The SEC brought its first actions resulting from its EPS initiative in September 2020 against Interface and Fulton Financial. Its third action was issued in August 2021 against Healthcare Services Group.

As stated in the SEC order, Northen directed the improper accounting adjustments “without conducting an analysis of the appropriate accounting criteria under generally accepted accounting principles (GAAP) and without adequately memorializing the basis for his decision to reduce the accounting reserves at issue.”

As a result, according to the SEC order, Rollins reported misstated net income and EPS in its quarterly reports and in its earnings releases for the first quarter of 2016 and the second quarter of 2017 “and further made materially false and misleading disclosures regarding its EPS performance in those two quarters,” the SEC order stated.

The SEC order also found that “Rollins made other accounting entries that were not supported by adequate documentation in multiple additional quarters from 2016 through 2018,” the agency stated.

Grewal stated the action was made possible by “the SEC staff’s ever-increasing sophistication with data … and underscores that we will continue to pursue public companies that lack adequate accounting controls and engage in improper earnings management practices.”

The SEC’s order found both Rollins and Northen violated the Securities Act of 1933, and that Rollins violated the financial reporting, books and records, and internal controls provisions of the Securities Exchange Act of 1934.

The order further found Northen “violated Section 13(b)(5) and Rule 13b2-1 of the Exchange Act and further caused Rollins’ violations of the financial reporting, books and records, and internal controls provisions of the Exchange Act.”

Rollins neither admitted nor denied the SEC’s findings.

“Since the company first learned of this investigation, we have taken this matter very seriously, conducting an internal review and taking proactive steps to address the findings,” stated Elizabeth Chandler, general counsel and corporate secretary at Rollins.

“We have also reevaluated and strengthened our internal controls over financial reporting and improved processes, procedures, and supporting documentation, including those related to management’s judgments and estimates impacting reported financial results,” Chandler added.

In a statement, Rollins said the individuals who were leading the accounting department at the time are no longer employed by the company, “and there will be no restatement of the company’s historical financial results related to the SEC’s investigation.”