Telecommunications Company Settles Charges for Reporting Misleading "Cost-of-Revenue"

A multinational telecommunications and internet service provider settled charges with the SEC for making materially misleading statements and omissions regarding the "cost-of-revenue" ("COR") in its annual, quarterly and current reports.

In an Order, the SEC stated that the company experienced "rapid growth" due to a series of acquisitions but failed to integrate its acquired companies into its systems. As a result, the SEC said that there was a "persistent and growing discrepancy" between the actual invoices the company received through a third-party bill processing system and what the company expected its COR should be based on underlying supplier contracts in its client management database.

The SEC also found that there was a "knowledge disconnect" between the company's operations and accounting employees, which caused the company's conduct to fall below the standard of care. The SEC concluded that the company violated Securities Act Sections 17(a)(2) and (3) ("Fraudulent Interstate Transactions") and Exchange Act Sections 13(a), 13(b)(2)(A) and (B) ("Periodical and other reports"), and Rules 12b-20 ("Additional information"), 13a-1 ("Requirements of annual reports"), 13a-11 ("Current reports on Form 8-K"), 13a-13 ("Quarterly reports on Form 10-Q") and 13a-15(a) ("Controls and procedures") thereunder.

To settle the charges, the company agreed to cease and desist from further regulatory violations. The SEC credited the company's cooperation during the SEC investigation, and determined not to impose a civil penalty.