August 25, 2021

SEC Enforcement: “EPS Initiative” Notches Another Settlement

Yesterday, the SEC announced a $6 million settlement with a company that allegedly reported inflated earnings per share for several quarters, which caused the company to meet analysts’ consensus estimates when it otherwise would’ve missed. It sounds like the fine could’ve been worse – the order calls out the company’s cooperation and prompt remedial acts. The SEC also charged the company’s CFO & controller.

According to the SEC’s order, the problem arose in part out of the company’s failure to record & disclose litigation-related loss contingencies in the appropriate quarters, in addition to other shortcomings in disclosure controls. Here’s an excerpt:

Had the company properly recorded the financial impact of the loss contingencies at the time they were probable and reasonably estimable, the company would have reported lower EPS and missed research analysts’ consensus EPS estimates in many of the applicable quarters, including by as little as a penny. The company also would not have been able to report multiple quarters of EPS growth, including then-record-high EPS. For the quarters when the company eventually accrued for the loss contingencies, the accruals contributed to the company’s reporting of a net loss and loss per share, or reporting EPS that missed consensus estimates by a wide margin.

Consequently, the company’s financial statements filed with the Commission were materially misleading during these periods.

This enforcement action underscores a few things. One, loss contingencies are always a tricky disclosure topic, and you should check out our “Contingencies” Practice Area and our “Legal Proceedings Handbook” for help – in addition to following your auditor’s guidance. Second, the SEC takes reporting errors particularly seriously when they make the difference between meeting or missing expectations.

Lastly, this is the third action to result from the Enforcement Division’s EPS Initiative – which, according to the SEC, “uses risk-based data analytics to uncover potential accounting & disclosure violations caused by, among other things, earnings management practices.” John blogged about the first two actions last fall.

Liz Dunshee