Executives Settle SEC Charges for Accounting Violations

The former CEO and chief financial officer ("CFO") of a Flexible Spending Account services company settled SEC charges for making material misstatements and omissions that resulted in the company's improper recognition of revenue.

In its Order, the SEC found that the CEO and CFO instructed the company's accounting staff and external auditor to recognize anticipated revenue from a large public-sector client despite the client communicating to the company that the client would not pay for certain development and transition work in connection with the contract. The SEC found that, even after the company's accounting staff and external auditor questioned the status of the supposed revenue, the CEO and CFO failed to disclose that the client denied owing the amounts. As a result, the company overstated its revenue in its 2016 Q2, Q3 and year-end financial statements, and the company's 2017 public offering referenced the year-end financial statement with the overstated revenue. The company restated these financial statements in 2019.

The SEC determined that the CEO and CFO's conduct constituted violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act ("Fraudulent Interstate Transactions"), Exchange Act Rules 13a-14 ("Certification of Disclosure in Annual and Quarterly Reports"), 13b2-1 ("Falsification of Accounting Records") and 13b2-2 ("Representations and Conduct in Connection with the Preparation of Required Reports and Documents"), and Section 204 of the Sarbanes-Oxley Act of 2002. Additionally, the CEO and CFO's conduct resulted in the company violating the reporting and records provisions under Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Exchange Act Rules 12b-20 ("Additional Information"), 13a-1 ("Requirements of Annual Reports"), 13a-11 ("Current Reports on Form 8-K") and 13a-13 ("Quarterly Reports on Form 10-Q").

To settle the charges, the CEO agreed (i) to a censure, (ii) to a $75,000 penalty and (iii) to reimburse the company $1,929,740 for incentive-based compensation and profits from the sale of the company's stock that he received during the time the violations took place. The CFO agreed (i) to a censure, (ii) to a $100,000 penalty and (iii) to reimburse the company $157,590 for the incentive-based compensation he received during the time the violations took place. The CEO and CFO settled the case without admitting or denying the SEC's findings.

Tags