In a data analytics case, the SEC imposes the "highest penalty to date"

On Monday, the Securities and Exchange Commission (SEC) credited its risk-based data analytics initiative with resulting in the "highest penalty to date" against a publicly traded company that used improper accounting to boost its quarterly earnings per share (EPS).

Rollins, a pest control services provider, and Paul Edward Northern, the company's then-Chief Financial Officer, agreed to pay civil penalties of $8 million and $100,000, respectively, to settle charges that the company made unsupported reductions to its accounting reserves in amounts sufficient to allow it to round up reported EPS to the next penny.


"This is the fourth action, and the highest penalty to date, against an issuer in connection with the Division of Enforcement’s highly successful and continuing EPS Initiative, which uses data analytics to uncover hard-to-detect accounting and disclosure violations by public companies," said Gurbir Grewal, the SEC's Division of Enforcement's director.


In September 2020, the SEC filed the first of its EPS-related actions against Interface and Fulton Financial. Healthcare Services Group was the target of its third action, which was filed in August 2021.

Northen made the improper accounting adjustments "without conducting an analysis of the appropriate accounting criteria under generally accepted accounting principles (GAAP) and without adequately memorializing the basis for his decision to reduce the accounting reserves at issue," according to the SEC order.


Rollins reported misstated net income and EPS in its quarterly reports and earnings releases for the first quarter of 2016 and the second quarter of 2017 as a result, according to the SEC order, "and further made materially false and misleading disclosures regarding its EPS performance in those two quarters."


"Rollins made other accounting entries that were not supported by adequate documentation in multiple additional quarters from 2016 through 2018," according to the SEC order.


The SEC action was made possible, according to Grewal, by "tthe SEC staff’s ever-increasing sophistication with data … and underscores that we will continue to pursue public companies that lack adequate accounting controls and engage in improper earnings management practices. "


The SEC's order found that both Rollins and Northen broke the Securities Act of 1933, as well as the Securities Exchange Act of 1934's financial reporting, books and records, and internal controls provisions.


"Northen violated Section 13(b)(5) and Rule 13b2-1 of the Exchange Act and further caused Rollins’ violations of the financial reporting, books and records, and internal controls provisions of the Exchange Act," according to the order.


Rollins made no admissions or denials in response to the SEC's findings.


Rollins' general counsel and corporate secretary, Elizabeth Chandler, stated, "Since the company first learned of this investigation, we have taken this matter very seriously, conducting an internal review and taking proactive steps to address the findings."


"We have also reevaluated and strengthened our internal controls over financial reporting, and improved processes, procedures and supporting documentation, including those related to management’s judgments and estimates impacting reported financial results," Chandler continued.


Rollins said in a statement that the people in charge of the accounting department at the time are no longer with the company, and that "there will be no restatement of the company’s historical financial results related to the SEC’s investigation."

By fLEXI tEAM