SEC targets accounting fraud
In the early 2000s, the United States Securities and Exchange Commission (SEC) was sharply reminded of the dangers of accounting fraud after Enron and WorldCom went bankrupt within months of each other. In the years following these corporate accounting scandals, the SEC maintained an aggressive enforcement regime that prioritized the identification and eradication of similar corporate accounting frauds.
Over the past few years, the SEC has continued to focus its enforcement efforts on accounting fraud as well as other violations that affect retail investors. Despite these efforts, however, companies continue to “cook the books” when it comes to crunching the numbers. Fortunately for investors, whistleblowers have greatly helped the SEC quickly identify and stop these frauds. In fact, since the enactment of the SEC’s Whistleblower Program in 2011, whistleblowers have consistently been one of the SEC’s most potent weapons in its enforcement arsenal against accounting fraud.
SEC Whistleblower Program
Under the SEC’s Whistleblower Program, the SEC will award awards to whistleblowers who provide original information, such as accounting fraud disclosures, that lead to enforcement actions with total monetary penalties greater than $1 million. of dollars. A whistleblower may receive a reward of between 10% and 30% of monetary penalties collected in successful actions brought by the SEC and related actions brought by other regulators or law enforcement authorities.
The SEC’s Whistleblower Program allows whistleblowers to submit whistleblowers anonymously if they are represented by counsel in connection with their whistleblower. An experienced SEC whistleblower attorney can skillfully guide whistleblowers through the process, maximizing the likelihood that their identity will not be revealed to unauthorized parties.
Since 2011, the SEC has awarded more than $1.2 billion in whistleblower awards. The largest SEC whistleblower awards to date are $114 million, $110 million and $50 million. See some of the SEC whistleblower cases that have resulted in major awards.
Whistleblower Tips Help the SEC Identify and Stop Accounting Fraud
Whistleblower reports related to violations in corporate filings and financial statements have historically been one of the most common categories of reports submitted to the SEC. In fact, according to the annual reports of the SEC Whistleblower Program, the number of such whistleblowers has increased. every year since the opening of the SEC Whistleblower Office in August 2011:
- 2011: 51 tips related to corporate disclosures and financial statements
- 2012: 547 tips related to corporate disclosures and financial statements
- 2013: 557 tips related to corporate disclosures and financial statements
- 2014: 610 tips related to corporate disclosures and financial statements
- 2015: 687 tips related to corporate disclosures and financial statements
- 2016: 938 tips related to corporate disclosures and financial statements
- 2017: 954 tips related to corporate disclosures and financial statements
- 2018: 983 tips related to corporate disclosures and financial statements
- 2019: 1,107 tips related to corporate disclosures and financial statements
- 2020: 1,710 tips related to corporate disclosures and financial statements
- 2021: 1,913 tips related to corporate disclosures and financial statements
In 2016, a former Monsanto executive received a $22 million SEC whistleblower award for reporting a well-hidden accounting violation to the SEC. Monsanto was fined $80 million for accounting violations.
Red flags to identify financial statements and accounting fraud
Accurate financial reporting is integral to maintaining public markets that operate fairly and efficiently. The SEC relies on industry insiders, such as the former Monsanto executive, to help identify and report accounting fraud and to help ensure successful enforcement action. Former Chief Enforcement Officer Andrew Ceresney noted that while the SEC’s focus on accounting fraud has yielded positive results, it is important to remain alert to such misconduct and to remember causes of previous corporate accounting scandals, as these causes continue to be the same in new accounting scandals. . Red flags include:
- Significant pressure to meet earnings and other performance expectations;
- Excessive emphasis on short-term performance rather than long-term success;
- Poor monitoring in units and subsidiaries;
- Greater growth in reporting and accounting infrastructure; and
- Overreliance of management on process and poor “tone at the top”.
SEC Enforcement Actions Against Accounting Fraud
See examples of SEC enforcement actions filed against companies for accounting fraud and violations below:
In the Maxwell Technologies case: The SEC has charged Maxwell Technologies, its chief sales officer, and former CEO and former comptroller, in a fraudulent revenue recognition scheme designed to inflate the company’s reported financial results. The SEC said that “Maxwell posted revenue before it was actually earned, to fool investors into believing that the company’s most important business segment…was growing faster than it was in reality.” Maxwell violated anti-fraud books and records and internal accounting controls provisions of federal securities laws. Maxwell was fined $2.8 million, while former sales manager and business executive Van Andrews was fined $50,000. The former CEO and former Maxwell controller were also ordered to pay $80,000 in restitution and prejudgment interest, and fined $20,000 respectively. [Press Release]
In the Matter of Panasonic Corporation: The SEC accused Panasonic Avionics Corp (“PAC”) of fraudulently overstating pretax and net income by prematurely recognizing more than $82 million in revenue for the fiscal quarter ending June 30, 2012. PAC backdated an agreement with a state corporation. airline, providing misleading information to the PAC auditor. In addition, PAC did not have sufficient internal accounting controls and did not maintain accurate books and records regarding its transactions. Panasonic was ordered to pay approximately $143 in restitution and prejudgment interest. In a separate Justice Department criminal action, Panasonic was ordered to pay a fine of more than $137 million for violating the FCPA. [Press Release]
SEC vs. Tangoe, Inc.: The SEC charged Tangoe with accounting fraud when it misreported the existence and/or timing of approximately $40 million in revenue, out of a total of $566 million in revenue for the years in question. Tangoe violated its publicly stated policy on reported earnings by engaging in sham transactions with a large client during fiscal years 2014 and 2015, to inflate Tangoe’s earnings that were required to be reported by the end of the year. Tangoe further entered into agreements with a payment processor and negotiated a series of contractual agreements obliging the processor to make payments which were recognized as revenue for fiscal years 2014 and 2015, thereby reducing the material shortfalls of Tangoe in terms of revenue for the relevant quarters, when they could not be recognized. The SEC charged Tangoe, its former CEO Albert R. Subbloie, former chief financial officer Gary R. Martino, former vice president of finance Thomas H. Beach and former senior vice president of expense management operations Donald J. Farias, all of violation of federal securities. laws. Tangoe was fined $1.5 million. [Press Release]
SEC c. SA Exploration Holdings Inc.: The SEC has accused seismic data company SAExploration Holdings Inc. (SAE) of a multi-year accounting fraud that falsely inflated the company’s revenue by about $100 million and concealed the theft of millions by the leaders. According to the SEC complaint, SAE executives entered into a series of seismic data acquisition contracts totaling approximately $140 million with a supposedly independent Alaska-based company that was in fact controlled by two of the executives. Of the amount recorded by SAE in revenue, approximately $100 million was incorrectly recorded due to the Alaska company’s inability to pay and control of the company by SAE executives. [Press Release]
In Manitex International, Inc.: The SEC has charged Manitex, a manufacturer and distributor of cranes, forklifts and heavy equipment, with accounting fraud schemes that resulted in the release of materially inaccurate financial statements. According to SEC orders, Manitex improperly accounted for and misled its external auditor about non-existent inventory. Additionally, Manitex also incorrectly accounted for revenue from approximately $12 million of alleged “bill and hold” crane sales and misled its external auditor. [Press Release]
SEC c. Revolution Lighting Technologies Inc.: The SEC has charged Revolution Lighting Technologies Inc. with an accounting fraud that falsely inflated its reported earnings over a four-year period. According to the SEC complaint, from late 2014 to mid-2018, Revolution Lighting used two accounting schemes to incorrectly recognize revenue at the end of fiscal quarters to compensate for shortfalls: (1) sales staff suffered pressures to incorrectly record projected future sales as current “bill and hold” sales; and (2) the company recognized revenue from unrealized sales. [Press Release]
How to Report Accounting Fraud and Win an SEC Whistleblower Award
To report accounting fraud and be eligible for a reward under the SEC’s Whistleblower Program, the SEC requires whistleblowers or their attorneys to report the whistleblower online through the SEC’s Whistleblower, Complaint, or Referral Portal. or mail/fax a TCR form to the SEC Whistleblower Office. . Before submitting a report, whistleblowers should consult with an experienced SEC attorney and review SEC rules to, among other things, understand eligibility rules and consider factors that may significantly increase or decrease the size of a future whistleblower award. Whistleblowers are also permitted to submit information anonymously if they are represented by counsel in connection with their information.