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Commissioner Aguilar Criticizes Lenient Penalties Against Accountant in Financial Reporting Misconduct

SEC Commissioner Luis Aguilar issued a strong dissenting critique of the commission’s settlement order against an accountant who served as a CFO of a computer services company that allegedly engaged in improper revenue inflation scheme. The accountant was fined, but Aguilar argued that he should have also been suspended as a public company accountant.

SEC Commissioner Luis Aguilar criticized that the penalties against an accountant for alleged financial reporting fraud are too light and issued a dissenting opinion on the commission’s settlement order on August 28, 2014.

The case involved alleged improper revenue inflating schemes by then-CEO Lynn Blodgett and then-CFO Kevin Kyser of Dallas-based Affiliated Computer Services (ACS) which has since been bought by Xerox Corp. To settle the SEC’s charges, Blodgett agreed to pay about $465,000 and Kyser about $210,000.

However, “given the egregious conduct that Mr. Kyser engaged in at ACS, the Commission’s settlement, which lacks fraud charges or a timeout in the form of a Rule 102 (e) suspension, is a wrist slap at best,” Aguilar said.

SEC Chair Mary Jo White recused herself from the case.

“Lynn Blodgett is pleased to put this matter behind him without any bar to continuing to serve as an officer or director of a public company and without admitting or denying any allegations made by the SEC,” said Blodgett’s attorney Paul Coggins, a partner with Locke Lord Bissell & Liddell LLP.

Attorney for Kyser did not immediately respond to request for comment.

The SEC said shortly before the end of its first quarter in fiscal year 2009, ACS, which provides business process outsourcing and information technology services, faced with the prospect of not meeting analyst expectations with sluggish sales. So, ACS allegedly arranged for an equipment manufacturer to redirect through ACS pre-existing orders that the manufacturer already had received from one of its customers.

“This gave the appearance that ACS was involved in resale transactions, but ACS in fact had no such involvement,” the SEC said. “ACS went on to report $124.5 million in fiscal year 2009 revenue from these transactions as though it had resold the equipment itself.”

In Aguilar’s view, the penalties against Kyser should have been much stronger because in his role as CFO, he understood exactly what he was doing in making the company’s revenues look better. Kyser was responsible in allegedly making false and misleading filings with the SEC, earnings releases, and analysts conference calls, signed false certifications on periodic filings, and received an inflated bonus based on the company’s financial performance that was overstated by 43 percent, among other things.

“Accountants—especially CPAs—serve as gatekeepers in our securities markets,” Aguilar said. “When these accountants engage in fraudulent misconduct, the Commission must be willing to charge fraud and must not hesitate to suspend the accountant from appearing or practicing before the Commission.”

Instead, Aguilar said the commission chose to charge Kyser with limited, narrow non-fraud charges that comprise of violations of the books and records, internal controls, reporting, and certification provisions of securities laws.

“In the past, respondents with the same state of mind and similar type of misconduct as Mr. Kyser have been charged with violations of the antifraud provisions,” the commissioner said. In addition, when CPAs are involved in serious securities fraud, especially misconduct related to accountant’s core expertise of financial reporting, Aguilar said the SEC has banned them from doing work for public companies under Rule 102 (e) of the SEC’s Rules of Practice.

Aguilar said he’s worried that the SEC may be getting into a practice of accepting settlements without charging fraud and suspending accountants in financial reporting and disclosure cases. Moreover, he’s worried that it reflects a lack of conviction to charge what the facts warrant.

In fiscal 2010, the SEC brought 117 financial reporting and disclosure cases and imposed Rule 102 (e)) suspensions in 54 percent of those cases. In 2011, the number of cases fell to 86 and imposed the suspensions in 53 percent of the cases. In 2012, the cases amounted to 76 and 49 percent of those cases had suspensions. In 2013, the cases further fell to 68 and only 41 percent faced suspensions.

“These declining numbers reveal a departure from the Commission’s efforts to keep bad apples out of the securities industry, and this puts investors and the integrity of the Commission’s processes at grave risk,” Aguilar said. “I fear that cases in the future will continue to be weak.”

“Prosecuting accounting and financial fraud is a high priority for the agency,” said Andrew Ceresney, director of the SEC’s Division of Enforcement, in response to Aguilar’s statement. “In fact, our financial reporting cases for 2014 so far have surpassed last year’s total number of cases by 21 percent. In July 2013, the Division of Enforcement formed the Financial Reporting and Audit Task Force to strengthen our efforts against issuers, executives and auditors who engage in accounting fraud, and we are already seeing an uptick in the number of investigations. We make our enforcement decisions based on the evidence, and we always push for the strongest charges and remedies possible given the circumstances of the case.”

In the meantime, according to an April study examining political connections and SEC enforcement, Maria Correia of the London Business School found that “politically connected firms on average are less likely to be involved in SEC enforcement actions and face lower penalties if they are prosecuted by the SEC.”

“Contributions to politicians in a strong position to put pressure on the SEC are more effective than others at reducing the probability of enforcement and penalties imposed by an enforcement action,” the study said. “Moreover, the amounts paid to lobbyists with prior employment links to the SEC, and the amounts spent on lobbying the SEC directly, are more effective than other lobbying expenditures at reducing enforcement costs faced by firms.”