The SEC on June 7, 2022, said that it charged software company Synchronoss Technologies, Inc., for improper accounting of revenues from at least 2013 through 2017.
Without admitting or denying the SEC’s findings, Synchronoss agreed to pay a civil penalty of $12.5 million to settle the charges.
The commission’s enforcement action relates to the company’s July 2018 announcement of restated audited financial statements for fiscal years 2015 and 2016 and selected financial data for fiscal years 2013 and 2014 totaling about $190 million in cumulative revenues.
The company acknowledged that numerous transactions were improperly booked, leading it to file materially misleading financial statements. The company also said it had “pervasive material weaknesses” in its internal controls over financial reporting (ICFR).
Synchronoss, based in Bridgewater, New Jersey, primarily makes software for telecommunications companies.
In a statement, President and CEO Jeff Miller said that Synchronoss is pleased to settle the legacy matter and looks forward to focus on its growth.
“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,” he added.
The SEC did not charge founder and former CEO Stephen Waldis, but he agreed to reimburse the company for more than $1.3 million in profits made through stock sales and bonuses. He will also give back previously granted shares of the company under the clawback Section 304 of the Sarbanes-Oxley Act of 2002. His attorney had no comment.
But seven senior employees, including former CFO Karen Rosenberger and former controller Joanna Lanni, were charged in the accounting misconduct.
The SEC said Rosenberger allegedly “sought to cover up” the misconduct “by lying” to the external auditor, by falsifying the company’s books and records, and by failing to maintain and circumventing the company’s accounting controls, according to a complaint filed in federal district court in Manhattan.
In the complaint, the SEC accused Lanni of alleged improper revenue recognition, circumvention of company’s accounting controls in connection with one of five transactions by providing a misleading memo to the auditor regarding the transaction.
The commission is seeking jury trial against the former CFO and controller.
Rosenberger’s attorney did not immediately respond to a request for comment.
Lanni’s attorney, Scott B. McBride of Lowenstein Sandler LLP, disputed the SEC’s charges.
“The SEC has determined to try and wreck Ms. Lanni’s livelihood on what amounts to a theory of strict liability based solely on her job title,” he said. “The Commission has charged her simply for signing off on a single accounting memorandum. That memo was drafted, analyzed, and/or approved by multiple accounting professionals, including a team of independent, outside auditors from a Big Four accounting firm. None of those professionals had access to less information than did Ms. Lanni, and Ms. Lanni hid nothing from any of them, as the charges reflect. She is tremendously disheartened by the misguided charges, but looks forward to demonstrating in court that she did absolutely nothing wrong.”
Separately, in September 2021, the Public Company Accounting Oversight Board (PCAOB) fined two CPAs from Ernst & Young LLP in connection with their audit work for Synchronoss.
Accounting Violations
The SEC said that the restatement is largely on three categories of transactions:
- lack of persuasive evidence of an arrangement for transactions;
- acquisitions and divestitures in which company recognized revenue on license agreements instead of combining those purported amounts with the purchase or sales prices; and
- license and hosting transactions in which company converted prior multi-term software-as-a-service (SaaS) agreements into perpetual license agreements, and improperly recognized the revenue upfront instead of recognizing it ratably over the term of the arrangements.
“Investors are entitled to rely on financial statements that are free of accounting improprieties, and when an issuer and its executives and employees engage in accounting gimmicks, we will use every available tool, including significant corporate penalties and individual accountability, to address such misconduct,” SEC Enforcement Director Gurbir Grewal said in a statement. “Today’s action should also put public company executives on notice that even when they are not charged with having a role in the misconduct at issue, we will still pursue clawbacks of compensation under SOX 304 to ensure they do not financially benefit from their company’s improper accounting.”
Settlements
Former general counsel Ronald Prague was fined a penalty of $25,000. He cannot practice before the SEC as an attorney for 18 months. His lawyer did not immediately respond to a request for comment.
Others who also agreed to settle are:
- Clayton “Charlie” Thomas, who was senior vice president of analytics, was fined $90,000. His attorney did not immediately respond to a request for comment.
- Marc Bandini, who was a senior salesperson, was fined $75,000. His attorney had no comment.
- Daniel Ives, who was executive vice president of investor relations, was fined $15,000. His attorney did not immediately respond to a request for comment.
- John Murdock, currently still with the company, was senior director of procurement and business operations during the relevant company. He was also fined $15,000. His attorney did not immediately respond to a request for comment.
This article originally appeared in the June 8, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.
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