Tuesday, October 20, 2020

ICYMI: SEC Cracks Down On Earnings Smoothing and other "Beat by a Penny" tricks

Jack Welsh weeps.* Well, he's dead but he would be weeping if he could.

From the Securities and Exchange Commission, September28:

SEC Charges Companies, Former Executives as Part of Risk-Based Initiative
Interface and Two Former Executives Charged With Accounting and Disclosure Violations; Fulton Financial Corporation Charged With Disclosure Violations


Washington D.C., Sept. 28, 2020 —

The Securities and Exchange Commission today filed settled actions against two public companies for violations that resulted in the improper reporting of quarterly earnings per share (EPS) that met or exceeded analyst consensus estimates.  The actions are the first arising from investigations generated by the Division of Enforcement’s EPS Initiative, which utilizes risk-based data analytics to uncover potential accounting and disclosure violations caused by, among other things, earnings management practices.

The SEC’s order against Interface Inc., a Georgia-based modular carpet manufacturer, finds that in multiple quarters in 2015 and 2016, the company made unsupported, manual accounting adjustments that were not compliant with GAAP.  These adjustments were often made when Interface’s internal forecasts indicated that the company would likely fall short of analyst consensus EPS estimates.  The order finds that the adjustments boosted the company’s income, making it possible for Interface to consistently report earnings that met or exceeded consensus estimates.  According to the order, Interface’s former Controller and Chief Accounting Officer Gregory J. Bauer directed the unsupported adjustments, including those made to management bonus accruals and stock-based compensation accounts.  The order also finds that Interface’s former CFO Patrick C. Lynch caused Bauer to direct some of the unsupported entries. 

The SEC’s order against Fulton Financial Corporation, a Pennsylvania-based financial services company, finds that the company inaccurately presented its financial performance in late 2016 and early 2017.  During two quarters in which Fulton was on track to meet or beat analyst consensus EPS estimates, the order finds that Fulton’s public filings included a valuation allowance for its mortgage servicing rights that was at odds with the valuation methodology described in the same filings.  The order finds that in mid-2017 Fulton belatedly reversed the valuation allowance, increasing its EPS by a penny in a quarter when it otherwise would have fallen short of consensus estimates.  As set forth in the order, Fulton’s disclosures created the misleading appearance of consistent earnings across multiple reporting periods....MORE

*From a 2010 post:

I haven't owned GE since '99. I was fortunate to not own this stock for the last decade; as of the open on Friday the stock was down over 50% during Immelt's nine-year tenure. Friday's 3.22% up-move got the loss down to 48%.
In the late '90's a very wealthy and very smart investor said to me:

"GE's phony-baloney earnings smoothing is going to have to end, it's approaching the level of a joke, in addition to violating the '33 act"....
BigCharts (also on blogroll at right)