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Synchronoss will pay $12.5 million to settle allegations of accounting fraud by former executives.

Synchronoss Technologies, a software company, agreed to a $12.5 million settlement with the Securities and Exchange Commission (SEC) on Tuesday for "long-running accounting improprieties."

According to the SEC, seven senior Synchronoss employees were charged in connection with the alleged misconduct, including the former chief financial officer, controller, and general counsel.

Synchronoss engaged in "improper accounting" from at least 2013 to 2017, according to the SEC's order, with certain instances attributed to the actions of its senior executives. As a result, during the relevant period, the company filed "materially misstated financial statements in its annual, quarterly, and current reports."

"The impact of the improper accounting was material and in many instances allowed the company to meet earnings targets," the SEC stated.

Former Synchronoss CFO Karen Rosenberger and former Controller Joanna Lanni were named in a complaint filed in the United States District Court for the Southern District of New York. With respect to three transactions, Rosenberger is accused of aiding and abetting the public filing of materially false financial statements and engaging in fraud, while Lanni is accused of aiding and abetting the company's "improper revenue recognition" and circumventing accounting controls by providing a materially misleading memorandum to the auditor.

According to the complaint, Rosenberger attempted to conceal her misconduct by lying to an auditor, falsifying the company's books, and failing to implement or maintain the company's system of accounting controls.

Synchronoss announced in May 2017 that it would not be able to file its Form 10-Q on time. Its audit committee announced in the coming months that the financial statements for fiscal years 2014-16 and their respective quarterly periods could not be trusted.

According to the SEC, the company announced a restatement for FY2015-16 and restated selected financial data for FY2013-14 in 2018, totaling about $190 million in cumulative revenues for the four-year period.

According to the SEC, the restatement focused on three types of transactions for which Synchronoss improperly recognized revenue:

1. Transactions for which there was no convincing evidence of an arrangement; 

1. Transactions for which there was no convincing evidence of an arrangement; 

2. Acquisitions/divestitures in which it improperly recognized revenue on license agreement(s) instead of combining those purported amounts with the purchase or sales prices; and 

3. License/hosting transactions in which it improperly converted prior multiterm software-as-a-service agreements into perpetual license agreements and improperly recognized revenue upfront instead of ratably over the term.

Synchronoss agreed to stop violating securities laws and pay a $12.5 million civil penalty without admitting or denying the SEC's findings.

Ronald Prague, the company's former general counsel and chief legal officer, agreed to pay a $25,000 fine and be barred from appearing and practicing law before the SEC for 18 months after settling charges stemming from his role in deceiving auditors about two transactions.

Stephen Waldis, the company's founder and former CEO, agreed to repay more than $1.3 million in stock sale profits and bonuses without being charged, as well as return previously granted shares of company stock, as required by the Sarbanes-Oxley Act.

The move comes eight months after two EY auditors were fined by the Public Company Accounting Oversight Board for "failing to perform adequate procedures and obtain sufficient evidence concerning certain significant unusual transactions" during the Big Four firm's audit of Synchronoss.

According to the SEC's order, Synchronoss acknowledged "pervasive material weaknesses" in its internal control over financial reporting for the restatement period, including:

1. Failure to ensure the basic elements of revenue recognition were always met and accounted for appropriately;

2. Failure to maintain adequate oversight to guide individuals in applying internal control over financial reporting in preventing or detecting material accounting errors due to inadequate information;

3. Failure to design and maintain adequate review and approval controls when recording complex or nonroutine transactions;

4. Failure to maintain sufficient personnel with an appropriate level of accounting knowledge, experience, and training in the application of Generally Accepted Accounting Principles (GAAP) commensurate with the size of the entity and nature and complexity of financial reporting requirements; and

5. Failure to consistently maintain a corporate culture that prevented the occurrence of certain deviations from the company’s policy.

The company issued a statement acknowledging the SEC settlement and stating that the $12.5 million fine would be paid "in equal quarterly installments over two years."

"We are pleased to have entered into this settlement with the SEC regarding this legacy matter and look forward to continuing to place our focus on the company’s strategic growth initiatives," said Jeff Miller, Synchronoss' president and CEO. "This matter relates to historical transactions that the company restated almost four years ago, and Synchronoss believes that reaching this resolution now is the right outcome for our shareholders, customers, and key stakeholders."


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