SEC charges two companies and former execs with disclosure violations
The Securities and Exchange Commission filed settled actions against two public companies and two former executives on Monday for violations that resulted in the improper reporting of quarterly earnings per share that met or exceeded analyst consensus estimates.
The actions are the result of investigations by the Division of Enforcement’s EPS Initiative, which aims to uncover accounting and disclosure violations through risk-based data analytics.
The SEC’s first order comes against Interface Inc., a Georgia-based modular carpet manufacturer, which found the company made unsupported, manual accounting adjustments throughout 2015 and 2016 that were not GAAP-compliant. The order found that Interface’s former controller and chief accounting officer Gregory Bauer directed these adjustments, which included management bonus accruals and stock-based compensation accounts. The order also found that Interface’s former CFO Patrick Lynch caused Bauer to direct some of the unsupported entries.
The SEC’s second order comes against Fulton Financial Corp., a Pennsylvania-based financial services company. The order found that Fulton inaccurately presented its late 2016 and early 2017 financial performance. The order found that Fulton’s public filings included a valuation allowance for mortgage servicing rights that differed from the valuation methodology described in the same filings. The order found that in 2017, Fulton reversed the valuation allowance, increasing its EPS by a penny in a quarter when it would have otherwise fallen short of consensus estimates. The order found that Fulton’s disclosures created a misleading appearance of consistent earnings across multiple reporting periods.
“While difficult to detect, improper quarterly adjustments can have a material impact on reported EPS and how investors view a company’s reported financial results,” said Anita Bandy, associate director in the Division of Enforcement, per a statement. “Public companies must have accounting and disclosure controls sufficient to provide reasonable assurance that quarter-end adjustments comply with GAAP and do not hide weaker than expected performance.”
“Public company financial reporting should not present a misleading picture of performance,” said Stephanie Avakian, director of the SEC’s Division of Enforcement, in a statement. “As demonstrated by today’s actions, we will continue to leverage our internal data analysis tools to identify violations, including evidence of earnings management and other accounting or disclosure improprieties.”
The SEC’s order against Interface found that the company and Bauer violated antifraud provisions of the Securities Act of 1933 and that Bauer and Lynch violated the books and records provisions of the Securities Exchange Act of 1934. The order also found that Interface violated the reporting, books and records, and internal controls provisions of the Exchange Act, with Bauer and Lynch causing said violations.
Interface, Lynch and Bauer agreed to cease and desist from future violations of the charged provisions and pay civil penalties of $5 million, $70,000, and $45,000, respectively, without admitting or denying the SEC’s findings. Bauer and Lynch have also agreed to be suspended from appearing and practicing before the SEC as accountants, which includes not participating in the financial reporting or audits of public companies. The order permits Bauer to apply for reinstatement after three years and Lynch to apply for reinstatement after one year.
The SEC’s order against Fulton found that the company violated the reporting, books and records, and internal controls provisions of federal securities laws. Fulton agreed to cease and desist from future violations of the charged provisions and pay a $1.5 million penalty, without admitting or denying the SEC’s findings.
The SEC’s investigation of Interface was conducted by Sharan Custer, Colin Rand, and Matthew Spitzer, with assistance from Christopher Bruckmann of the Trial Unit, and supervised by Mark Cave, Kristen Dieter, and Ms. Bandy. The Fulton investigation was conducted by Sarah Allgeier, Matthew Spitzer, and Richard Haynes, and supervised by Mr. Cave and Ms. Bandy. Giz Tariku and Howard Kaplan in the Division of Enforcement’s Office of Investigative and Market Analytics also provided assistance.