The Securities and Exchange Commission charged Chicago-based Huron Consulting and two of its former executives Thursday with accounting violations, and the firm agreed to settle the charges by paying a $1 million penalty.
The consulting firm was founded by two dozen former Arthur Andersen partners after Andersen collapsed in the wake of the Enron and WorldCom scandals.
The SEC found that Huron failed to properly record redistributions of sales proceeds by the selling shareholders of four firms it had acquired. The selling shareholders redistributed the money to employees at those firms who stayed on to work at Huron as well as other Huron employees and themselves.
Because the redistributions were contingent on the employees’ continued employment with the firm, based on the achievement of personal performance measures, or not clearly for a purpose other than compensation, Huron should have recorded the redistributions as compensation expense in its financial statements.
By failing to do so, Huron overstated its pre-tax income to the public. Former CFO Gary Burge and former controller and chief accounting officer Wayne Lipski oversaw the accounting decisions at Huron. Burge and Lipski agreed to pay a total of nearly $300,000 in disgorgement and penalties to settle the charges against them, according to the SEC.
“Huron’s income overstatements obscured the fact that a substantial portion of the money it paid to acquire other consulting firms was being used to retain professional talent at the firm,” said SEC Chicago Regional Office director Merri Jo Gillette in a statement. “Huron, Burge, and Lipski should have known that their flawed accounting gave investors a misleading impression of the profitability of Huron’s acquisitions.”
According to the SEC’s order instituting settled cease-and-desist proceedings, Huron’s financial statements for 2006, 2007, 2008 and the first quarter of 2009 were materially misstated as a result of these accounting failures. In August 2009, Huron restated those financial statements, thus reducing its net income by approximately $56 million.
The SEC’s order finds that in January 2008, Huron, Burge and Lipski considered an SEC Staff Accounting Bulletin, which referenced accounting principles applicable to the redistributions, but that they subsequently did not determine the full impact of the accounting principles on the company’s financial statements. As a result, Huron publicly overstated its pre-tax income by 3.7 percent for 2005, 6.09 percent for 2006, 30.45 percent for 2007, 68.59 percent for 2008, and 25.29 percent for the first quarter of 2009.
In agreeing to settle the charges without admitting or denying the SEC’s findings, Huron consented to the SEC’s order imposing a $1 million penalty and requiring the company to cease and desist from committing or causing any violations or any future violations of the securities laws.
Burge and Lipski, without admitting or denying the SEC’s findings, also consented to the order, which requires Burge to pay disgorgement of $147,763.12, prejudgment interest of $30,338.46, and a penalty of $50,000, and requires Lipski to pay disgorgement of $12,750, prejudgment interest of $3,584.94, and a penalty of $50,000. The order also requires Burge and Lipski to cease and desist from committing or causing any violations of the securities laws.
