TheCorporateCounsel.net

Last week, the SEC announced settled charges against a company and two of its former officers related to revenue recognition practices that caused the company to file materially misstated financial statements. Here’s an excerpt from the administrative summary:

According to the SEC’s order, under which USAT neither admitted nor denied the SEC’s findings, USAT attempted to maximize end-of-quarter revenue and meet its internal sales targets in two ways. First, they entered into purported bill-and-hold sales transactions that did not conform to the relevant accounting standards at the time of the transactions or the company’s publicly-stated sales and revenue recognition policies. Second, they inflated quarterly sales revenue by deliberately shipping devices to its customers that the customers had not ordered or explicitly told USAT they did not want in the face of inventory shortfalls.

With respect to the bill-and-hold practice, the order explains that, on two occasions during the period in question, the company billed customers for payment (even though it didn’t expect to collect until after delivery), held the related devices for future delivery (even if it had them in stock) and treated these purported sales as a bill-and-hold transaction. But these transactions didn’t actually meet the criteria to recognize revenue from a bill-and-hold transaction — in that the company initiated the bill-and-hold treatment, there was no fixed commitment to purchase, and the transactions lacked a fixed delivery date — plus the company didn’t disclose its use of such transactions.

With respect to shipping the wrong inventory, the company lacked inventory to fulfill customer orders for one device and allegedly engaged in various shenanigans involving shipping another device to meet sales goals for the quarter — including sending the unwanted device and allowing future exchanges, shipping the unwanted devices to a third party when a customer wouldn’t accept the delivery and shipping the wrong devices and blaming “shipping mistakes.” In each case, the company knew the devices would be returned when the correct product became available and shouldn’t have recognized revenue at the time of shipment. Eventually, the issues were identified and the company restated past financials.

While this enforcement action may be more a case of alleged wrongdoing than a trap for the unwary, these types of accounting fraud proceedings are a good reminder of the topics that continue to top the list of focus areas for the Enforcement Division.

– Meredith Ervine