The Securities and Exchange Commission has charged a Silicon Valley software company and two former executives in an accounting fraud where timesheets were falsified to hit quarterly financial targets.
The company, Saba Software, and the executives, former vice presidents Patrick Farrell and Sajeev Menon, have agree to settle the case.
An SEC investigation found that Farrell and Menon ran a scheme in which U.S.-based managers directed consultants in India to either falsely record time that they had not worked, or failed to record hours worked to conceal budget overruns from management and finance. The improper time reporting practices allowed Saba to achieve quarterly revenue and margin targets.
The company will pay $1.75 million to settle the charges. Without admitting or denying the findings, Farrell agreed to pay disgorgement and prejudgment interest of $35,017 and a penalty of $50,000, and Menon agreed to pay disgorgement and prejudgment interest of $19,621 and a penalty of $50,000.
Under the “clawback” provision of the Sarbanes-Oxley Act, Saba CEO Babak “Bobby” Yazdani will be required to reimburse the company $2.5 million in bonuses and stock profits that he received while the fraud was occurring, though he was not charged with any misconduct.
“CEOs and CFOs can be deprived of bonuses and stock profits if there is misconduct on their watch that requires a restatement by their employer,” said the director of the SEC’s Division of Enforcement, Andrew Ceresney, in a statement. “We will not hesitate to pursue clawbacks in appropriate cases.”
As well as software products, Saba sells professional services that account for approximately a third of its $120 million in annual revenue, and are delivered by a group of consultants in India. According to the SEC, its timekeeping practices of “pre-booking” and “under-booking” hours worked by these consultants violated GAAP. From Oct. 4, 2007, to Jan. 6, 2012, Saba Software cumulatively overstated its pre-tax earnings by approximately $70 million, according to the SEC settlement order.
The order stated that Farrell and Menon, who were responsible for seeing that the professional services group met financial targets, directed the consultants to manipulate their reported hours.
It further found that Saba’s internal accounting controls were ineffective, particularly for its India-based consulting group, which was known in the organization as a “black box,” because U.S. and European managers had little visibility into who was performing what work when.
“Saba Software used off-shore operations to cut costs, but also cut corners on its internal controls over financial reporting,” said Jina Choi, director of the SEC’s San Francisco Regional Office. “Weak internal controls create greater opportunity for accounting fraud, and investors are left holding the bag.”
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