The Securities and Exchange Commission has again targeted for enforcement members of company financial management who were alleged to have been involved in adjusting reserve accounts not in accordance with GAAP. While the subject of "earnings management" and "smoothing earnings" is an old one, it has certainly not faded in terms of SEC enforcement emphasis.
On August 27, 2010, the SEC charged both the former chief accounting officer and a former assistant controller of Dell with being involved in improperly adjusting reserves over a course of years in order to allow the company to meet financial targets. Without admitting or denying the SEC's allegations, each of the individuals agreed to settle the allegations, with the former chief accounting officer agreeing to pay a $175,000 penalty and the former assistant controller agreeing to pay a $25,000 penalty, along with disgorgement and prejudgment interest.
Each of the individuals also consented to an administrative order suspending him from appearing or practicing before the SEC as an accountant, with the former chief accounting officer having the right to apply for reinstatement after five years and the former assistant controller having the right to apply for reinstatement after three years.
The SEC charges arose from Dell's restatement of its financial statements announced in August 2006. Following that announcement, the Audit Committee of Dell's Board of Directors conducted an extensive independent investigation into certain of Dell's accounting and financial reporting practices.
Dell summarized certain of the findings of the Audit Committee investigation in Dell's 2007 Form 10-K as follows:
"The investigation raised questions relating to numerous accounting issues, most of which involved adjustments to various reserve and accrued liability accounts, and identified evidence that certain adjustments appear to have been motivated by the objective of attaining financial targets. According to the investigation, these activities typically occurred in the days immediately following the end of a quarter, when the accounting books were being closed and the results of the quarter were being compiled. The investigation found evidence that, in that timeframe, account balances were reviewed, sometimes at the request or with the knowledge of senior executives, with the goal of seeking adjustments so that quarterly performance objectives could be met. The investigation concluded that a number of these adjustments were improper, including the creation and release of accruals and reserves that appear to have been made for the purpose of enhancing internal performance measures or reported results, as well as the transfer of excess accruals from one liability account to another and the use of the excess balances to offset unrelated expenses in later periods…."
Among the many accrual and reserve adjustments determined by the SEC enforcement staff to have been in violation of GAAP were the following:
A significant portion of the SEC's allegations against these two individuals was based on intercompany emails among financial personnel concerning directions as to how these accruals were to be handled.
While the financial penalties in these settled charges are not substantial, the impact of these matters on financial management is enormous. Company financial management needs to continue to be vigilant in its application of GAAP, particularly with respect to the creation, review and release of reserves and contingency accruals, which are often based on very subjective judgments as to the likelihood and timing of the occurrence of future events. Financial management needs carefully to ensure that it strictly applies GAAP and timely creates, adjusts and releases reserves and accruals in accordance with applicable GAAP, with appropriate and timely disclosure.
Subjective judgments form part of everyday life for financial management, particularly with the review, adjustment and release of contingencies and reserves. Seldom is there a clear "black line" or certainty in these areas, and financial management generally exercises its best professional judgment. The key, often, is always staying the course, applying judgments in the best objective manner, with careful documentation and a clear and appropriate "tone at the top" financial culture.
Day Pitney Press Release
Michael Rave was quoted in an article, "Why Small Banks Are Rushing to Issue Subordinated Debt," in American Banker. Community banks are taking on more subordinated debt because interest payments are tax-deductible and the issues help bolster Tier 2 capital ratios, explains Rave in the report. Most buyers are pension funds, mutual funds and other community banks. "There's a lot of interest in them from institutional investors and investment banks are really pushing it," said Rave.
Stamford, Conn., August 24, 2015 - Day Pitney is pleased to announce that 68 attorneys have been selected for inclusion in the 2016 Best Lawyers in America. Best Lawyers ranks lawyers through peer-review surveys, and has been published annually since 1983.