Posted by Christie Malry on June 6, 2010 at 10:55 am
The SEC's website lists, often in gory detail, the cases that it's handled in the courts. This one is a real peach.
According to the SEC's complaint against Diebold, filed in U.S. District Court for the District of Columbia, the company manipulated its earnings from at least 2002 through 2007 to meet financial performance forecasts, and made material misstatements and omissions to investors in dozens of SEC filings and press releases. Diebold's improper accounting practices misstated the company's reported pre-tax earnings by at least $127 million. Among the fraudulent accounting practices used to inflate earnings and meet forecasts were:
- Improper use of "bill and hold" accounting.
- Recognition of revenue on a lease agreement subject to a side buy-back agreement.
- Manipulating reserves and accruals.
- Improperly delaying and capitalizing expenses.
- Writing up the value of used inventory.
Without admitting or denying the SEC's charges, Diebold consented to a final judgment ordering payment of the $25 million penalty and permanently enjoining the company from future violations of the antifraud, reporting, books and records, and internal control provisions of the federal securities laws.
Just check out that list of frauds! They're like something you'd learn in Accounting 101. These are hardly complex accounting gimmicks, a la Lehman, they're the most fundamental, obvious, blatant earnings management approaches you could possibly take.
Which, although their auditors, KPMG, appear to have been involved in the forensic work in cleaning up this mess, does rather make you wonder where they were at the time of the audit. The SEC's complaint indicates that the auditors did identify some problems but inadequate action was taken as a result (para. 25).
Now, I'm all for the auditor getting it in the neck when they're really to blame. But the happy ending for this story is that the SEC has really thrown the book at the directors.
Section 304 of the Sarbanes-Oxley Act deprives corporate executives of certain compensation received while their companies were misleading investors, even in cases where that executive is not alleged to have violated the securities laws personally. The SEC has not alleged that O'Dell engaged in the fraud. Under the settlement, O'Dell has agreed to reimburse the company $470,016 in cash bonuses, 30,000 shares of Diebold stock, and stock options for 85,000 shares of Diebold stock.
I approve heartily.