A new risk-based data analytics initiative at the Securities and Exchange Commission (SEC) has been credited for forming the basis of charges against two publicly traded companies for improper reporting of quarterly earnings per share (EPS).
Interface, a Georgia-based modular carpet manufacturer, and Pennsylvania-based Fulton Financial Corp. agreed to pay fines of $5 million and $1.5 million, respectively, to settle charges that the way they reported their EPS improperly inflated their revenue and stock prices. Two Interface executives were also fined and suspended from appearing before the SEC.
The two enforcement actions are the first to arise from the Division of Enforcement’s EPS initiative, “which utilizes risk-based data analytics to uncover potential accounting and disclosure violations caused by, among other things, earnings management practices,” according to an SEC press release Monday.
“As demonstrated by today’s actions, we will continue to leverage our internal data analysis tools to identify violations, including evidence of earnings management and other accounting or disclosure improprieties,” stated Stephanie Avakian, director of the SEC’s Division of Enforcement.
In the SEC’s enforcement order, Interface was accused of making “unsupported, manual accounting adjustments that were not compliant with generally accepted accounting practices (GAAP)” that increased the company’s revenue by about $10 million over several quarters in 2015 and 2016, the SEC said. In addition, the company’s former controller and chief accounting officer, Gregory Bauer, was fined $45,000 for directing some of the adjustments, while former CFO Patrick Lynch was fined $70,000 for ordering Bauer to make some of the adjustments, the SEC said.
Bauer and Lynch have also agreed to be suspended from appearing and practicing before the Commission as accountants, which includes not participating in the financial reporting or audits of public companies, the SEC said. Bauer can apply for reinstatement after three years, while Lynch can apply for reinstatement after one year.
Fulton settled allegations that it “inaccurately presented its financial performance in late 2016 and early 2017,” the SEC said. In the enforcement order against Fulton, the SEC said the company misrepresented the economic value of residential mortgage servicing rights to boost its revenue by about $1 million.
“While difficult to detect, improper quarterly adjustments can have a material impact on reported EPS and how investors view a company’s reported financial results,” stated Anita Bandy, an associate director in the Division of Enforcement. “Public companies must have accounting and disclosure controls sufficient to provide reasonable assurance that quarter-end adjustments comply with GAAP and do not hide weaker than expected performance.”
Neither company admitted nor denied the SEC’s findings but agreed to pay the fines.