WilmerHale Partner Lori Echavarria recently authored a Law360 article titled, “4 Enforcement Actions Highlight SEC’s Focus on Earnings.”
Excerpt: In the last three days of the U.S. Securities and Exchange Commission's fiscal year, the SEC announced four corporate settlements involving alleged improper earnings management. The SEC's Division of Enforcement also disclosed that two of these settlements arose out of an Earnings Per Share Initiative — a risk-based data analytics initiative designed to discover accounting and disclosure violations related to earnings management.
This flurry of activity makes clear that the Division of Enforcement continued to focus on earnings management in 2020 and will continue to do so next year.
What can we learn from these recent settlements? These four cases, announced on Sept. 28, 29 and 30, exemplify three different scenarios where the SEC concluded an issuer's efforts to meet earnings targets exceeded legal bounds.
The conduct charged ranges from disclosure failures of known trends regarding real sales and earned revenues, to accounting misstatements and errors, and on into outright fraudulent conduct involving false invoices and fake financing arrangements.
As these cases show, the SEC is watching issuers that meet or beat analyst consensus estimates and may investigate issuers if it determines investors are unaware of how the issuer's successful outcomes are achieved.