Thursday, September 4, 2014

SEC Charges Two Information Technology Executives With Mischaracterizing Resale Transactions to Increase Revenue

The Securities and Exchange Commission today charged two executives at a Dallas-based information technology company with mischaracterizing an arrangement with an equipment manufacturer to purport that it was conducting so-called “resale transactions” to inflate the company’s reported revenue.
An SEC investigation found that the then-CEO and then-CFO caused the disclosure failures at Affiliated Computer Services (ACS), which has since been acquired by Xerox Corporation.  ACS provided business process outsourcing and information technology services.  Shortly before the end of its first quarter in fiscal year 2009, ACS faced a scenario where the company’s revenue was set to fall short of company guidance and consensus analyst expectations, so ACS arranged for an equipment manufacturer to re-direct through ACS pre-existing orders that the manufacturer already had received from one of its customers.  This gave the appearance that ACS was involved in resale transactions, but ACS in fact had no such involvement.  ACS went on to report $124.5 million in fiscal year 2009 revenue from these transactions as though it had resold the equipment itself. 

The two individuals have agreed to pay nearly $675,000 to settle the SEC’s charges that they and ACS did not adequately describe the arrangement in its financial reporting, and the purported revenue in turn allowed ACS to publicly report inflated internal revenue growth (IRG).  They emphasized the inflated IRG as a key metric in earnings releases and other public statements to investors, and a portion of their annual bonuses was linked to IRG.
Read more here.
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