A
company’s chief financial officer, also a CPA, was barred from appearing or
practicing before the SEC for at least five years in the wake of an SEC
enforcement action charging him with knowingly participating in two schemes to
manipulate the company’s reported revenues and earnings. The SEC alleged that the
company artificially inflated reported revenues by approximately $20 million in
connection with a software sale to America Online, Inc. (AOL) in 2000.
According to the complaint, the CFO applied an accounting treatment to the
transaction that did not comply with GAAP and concealed the true nature of the
transaction with AOL from the independent auditors, which allowed the company
to artificially inflate its reported revenue. The CFO settled the enforcement
action without admitting or denying the SEC’s allegations and settled the
administrative proceeding without admitting or denying the findings. SEC v. Leslie,
et al., ND Calif.
After
five years, the CPA can apply for reinstatement. The application must satisfy
the SEC that the CPA or the firm he is associated with is registered with the PCAOB
and that no Board inspection of the firm identified any defects in the firm’s quality
controls indicating that the CPA would not be appropriately supervised.
The
SEC enforcement action further alleged that from at least 2000 until his
resignation in 2002, the CFO and others also applied three non-GAAP accounting practices
to smooth the company’s financial results and then concealed these
manipulations from the company’s independent auditors. The SEC said that the defendants
lied to and failed to disclose material information to the independent auditors
in violation of the federal securities laws. The Commission alleged that the
CFO participated in preparing and submitting documentation to the outside auditors
that concealed the true nature of the AOL transaction.
The
SEC also alleged that the CFO, along with the company’s CEO, gave the
independent auditors a materially misleading representation letter that failed
to disclose a number of important items. Instead, they represented that, with
regard to all the software transactions, they had disclosed all sales terms to
the company’s auditors and that the sales agreements represented the entire
arrangements and were not supplemented by either written or oral agreements. The
SEC said that the CFO failed to disclose the parties’ oral agreement to modify the
payment terms under the contracts to require simultaneous wire transfer. The
Commission further alleged that at an audit committee meeting at which the AOL
transactions was discussed with the independent auditors the CFO and CEO failed
to inform the auditors of the contingent nature of the software sale.