In a recent speech, SEC Enforcement Director Andrew Ceresney confirmed the SEC’s continued focus on issuer reporting and disclosure violations. The SEC has more than doubled its actions in the issuer-and-reporting area, from 53 in fiscal year 2013 to 114 in fiscal year 2015.
Under the SEC Whistleblower Program, whistleblowers may receive a reward for providing the SEC with original information about issuer’s reporting or disclosure violations. Importantly, even auditors and accountants may be eligible to receive rewards under the program. The lawyers at Zuckerman Law routinely represent accountants and auditors in whistleblower-retaliation and whistleblower-reward claims.
Accounting Fraud and SEC Enforcement Actions
SEC Chair Mary Jo White recently emphasized that “[c]omprehensive, accurate, and reliable financial reporting is the bedrock upon which our markets are based, and is essential to ensuring public confidence in them.” As such, the SEC has brought numerous enforcement actions for accounting fraud and other accounting violations, including:
On February 9, 2016, the SEC announced that Monsanto agreed to pay an $80 million penalty for insufficient internal accounting controls. According to the SEC’s order, the company failed to properly account for millions of dollars in rebates offered to retailers and distributors of Roundup after generic competition had undercut its prices and caused the company to lose significant share in the market. Monsanto booked substantial amounts of revenue from sales incentivized by the rebate program, but failed to recognize all of the related program costs at the same time. A whistleblower was rewarded more than $22 million for disclosing this fraud to the SEC.
On April 27, 2015, the SEC obtained a $131 million judgment against Symbol Technologies Inc. for fraudulent revenue-recognition practices, including quarter-end “stuffing” of Symbol’s distribution channel to help meet revenue and earnings targets imposed by its CEO.
Fraudulent Management Estimates and “Cookie Jar” Reserves
On June 5, 2015, Computer Sciences Corporation agreed to pay $190 million to settle charges that the company engaged in a wide-range accounting-and-disclosure fraud that materially overstated its earnings and concealed from investors significant problems with its largest contract. According to the SEC’s order, the company’s former Finance Director prepared a fraudulent accounting model in which he included made-up assumptions to avoid reporting a negative hit to the company’s earnings. The company also overstated its earnings by using “cookie jar” reserves and by failing to record expenses as required.
On September 27, 2016, Weatherford International agreed to pay a $140 million penalty to settle charges that it inflated its earnings by using deceptive income-tax accounting. According to the SEC’s order, Weatherford fraudulently lowered its year-end provision for income taxes each year so the company could better align its earnings results with its earlier-announced projections and analysts’ expectations. The company lowered its year-end provision for income taxes by making numerous post-closing adjustments to fill gaps and meet its previously disclosed effective tax rate.
On September 19, 2016, the SEC announced that public accounting firm Ernst & Young had agreed to pay $9.3 million to settle charges that two of the firm’s audit partners had “inappropriately close personal relationships” with their clients and thereby violated independence rules designed to ensure that firms maintain their objectivity and impartiality during audits. In one of the SEC’s orders, an EY audit partner was having a romantic relationship with a client’s Chief Accounting Officer. The main EY audit partner on the account noticed signs of this romantic relationship but failed to perform a reasonable inquiry. In the SEC’s second order, an audit partner was accused of excessive socializing with a client’s Chief Financial Officer. This socializing included attending sporting events, taking vacations, and incurring other significant entertainment expenses that did not serve a proper a business purpose.
Improper Asset Valuations
On August 6, 2015, Miller Energy Resources Inc. was charged with inflating values of oil and gas properties, resulting in misstated financial statements. According to the SEC’s order, the company overstated the properties’ value by more than $400 million as a result of the CFO’s relying on a reserve report that did not reflect fair value of the assets. In addition, the CFO double-counted $110 million of fixed assets already included in the reserve report.
The SEC recently issued new guidance on the agency’s interpretation of the rules and regulations on the use of non-GAAP financial measures. In a previous enforcement action, the SEC fined a company more than $1 million for misleading non-GAAP financial measures.
Retaliating Against Whistleblowers
On December 20, 2016, the SEC settled an internal-whistleblower retaliation claim with an Oklahoma energy company, SandRidge Energy Inc., for $1.4 million. According to the SEC order, the company used illegally restrictive separation agreements forbidding former employees from cooperating in SEC and other government investigations, and that SandRidge fired an employee who raised concerns about its accounting.
SEC Whistleblower Reward Program
Under the SEC Whistleblower Program, whistleblowers may be eligible for monetary awards when they voluntarily provide the SEC original information about violations of federal securities laws that leads the SEC to bring a successful enforcement action that results in monetary sanctions exceeding $1 million.
SEC Whistleblower Bounties
Whistleblowers are eligible to receive between 10% and 30% of the monetary sanctions collected. On September 22, 2014, a whistleblower was awarded more than $30 million for providing key information that led to a successful enforcement action.
Corporate Whistleblower Protection
The SEC Whistleblower Program also protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity. Furthermore, the Dodd-Frank Act protects whistleblowers from retaliation by their employers for reporting violations of securities laws.
SEC Whistleblower Attorneys
Transcript: As a former external auditor, I’m well-aware of the pressures that are involved with auditors and accountants. Especially when an SEC filing date is coming up. Perhaps there will be disagreements with clients or disagreements about a specific number in the financial statements.
Luckily for accountants and auditors there are many new lays that have been enacted that offer protections and incentives for raising reasonable concerns. Under the Sarbanes-Oxley Act and Dodd-Frank Act employees are protected against retaliation from their employer if they raise reasonable concerns about one of these violations.
In addition, in certain circumstances auditors and accountants may even qualify for an SEC whistleblower award for raising concerns about violations of federal securities laws.