ANOTHER SEC FINANCIAL FRAUD SETTLEMENT: MORE QUESTIONS
The settlement here raises more questions than it answers. According to the complaint, Mr. Periolat crafted the scheme and falsified the books, repeatedly making entries that he could have determined were wrong if he checked. How precisely he was able to falsify these records as a mid-level accounting employee without being questioned is not clear. Stated differently, where were his supervisors? The only things are known about them are: 1) everyone assumed that the internal projects were correct; 2) the CEO made it clear he wanted it “fixed” after the cause for the variance between projected and actual could not be determined; 3) subsequently Mr. Periolat and others were given a road map to the adjustments he made; and 4) for at least the second and third quarters, senior management was aware of his entries.
According to the complaint, Mr. Periolat’s mistake was assuming the internal actual calculations were wrong and then making adjustments without checking with anyone. Yet, the CEO and senior management assumed the projections on which guidance was based were correct, further assumed that Mr. Periolat’s adjustments were correct and further assumed that revenues almost 130% over actual were correct, all without verification. Presumably the CEO and CFO also relied on these unverified assumptions when executing their SOX certifications for each quarter.
Perhaps more importantly, the reason all these assumptions turned into wrong financial statements, according to the SEC, is that the internal controls of the company “were inadequate and did not detect the [multimillion dollar] adjustments.” Despite repeated failures however, there is no indication that the company has taken any steps to improve what appears to be an almost total lack of internal controls.
It is axiomatic that a key priority of law enforcement is to prevent a reoccurrence of improper conduct in the future. This has always been a key focus of SEC enforcement. If the SEC is going to fulfill its statutory obligation to protect investors and the markets from wrongful conduct, taking steps to make sure that the wrongful conduct will not be repeated is critical. Here, that means making sure, at a minimum, that the internal accounting controls are corrected and strengthened. Aside from the usual consent injunction however, the is no indication in this case that the SEC took any action to make sure this critical step was taken. The reason for this failure is unclear but needs to be resolved quickly if the enforcement program is going to become effective.
Oh. And the SEC did complete their investigation back then. Determined that it there was no "fraud" as you so title this misleading post. A small fine was played.
Do some homework for a change, counselor.