This type of post has been published several times before (see here and here among other posts), and once again today, to highlight an important (yet often overlooked) aspect of the Foreign Corrupt Practices Act: the FCPA has always been a law much broader than its name suggests.
Sure, the FCPA contains anti-bribery provisions which concern foreign bribery. Sure, the FCPA’s books and records and internal controls provisions can be implicated in foreign bribery schemes.
However, the fact remains that most FCPA enforcement actions (that is enforcement actions that charge or find violations of the FCPA’s books and records and internal controls provisions) have nothing to do with foreign bribery. For lack of a better term, let’s call these numerous enforcement actions non-FCPA, FCPA enforcement actions.
The latest example is this recent SEC enforcement action against Rollins Inc. (an Atlanta based company that provides termite and other pest control services to residential and commercial customers including through such brands as Orkin) and Paul Northern (the company’s for CFO) for engaging “in improper accounting practices in order to boost its publicly-reported quarterly earnings per share (EPS) to meet research analysts’ consensus estimates.”
In summary fashion, this administrative order finds:
“This matter involves improper earnings management practices by Rollins, Inc. (“Rollins”). During the quarterly close process in two quarters—the first quarter of 2016 and the second quarter of 2017—Rollins’ then-Chief Financial Officer, Paul Edward Northen, directed reductions to certain corporate-level accounting reserves for the purpose of enabling the company to publicly report earnings per share (“EPS”) in line with research analysts’ consensus estimates. At the time that Northen directed reductions to the reserve accounts, he was aware that the company’s preliminary earnings results were close to, but short of, consensus EPS estimates. Northen directed the reduction in the accounting reserve accounts, which had the effect of increasing the company’s net income, toward the very end of the quarterly close process, 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. Had these reserves not been reduced, Rollins would have missed consensus EPS estimates in the two quarters by one penny.
As a result of such conduct, Rollins reported misstated net income and EPS in its quarterly reports filed on Form 10-Q and in its earnings releases for the first quarter of 2016 and the second quarter of 2017, and further made materially false and misleading disclosures regarding its EPS performance in those two quarters.
Rollins’ improper reduction to accounting reserves took place in an environment of inadequate internal accounting controls. In particular, Rollins granted significant discretion to finance personnel, including the CFO, to determine the amount of reserves during the quarterly close process, at a time when such individuals were aware of potential shortfalls between the company’s financial results and internal and external financial targets, such as research analysts’ consensus EPS estimates. Although Rollins’ policies and procedures required accounting entries to have adequate supporting documentation, between the first quarter of 2016 and the fourth quarter of 2018, Rollins’ finance personnel recorded manual journal entries that impacted reserve accounts with inadequate documentation.
As a result, Rollins failed to devise and maintain sufficient internal accounting controls to prevent and detect the improper accounting and inadequately supported, period-end journal entries described herein, resulting in the underlying violations of the federal securities laws.”
Under the heading “Rollins Lacked Accurate Books and Records and Sufficient Internal Accounting Controls, and Failed to Maintain Internal Control Over Financial Reporting,” the order finds:
“Between the first quarter of 2016 and the fourth quarter of 2018, Rollins’ finance personnel, including Northen, made multiple quarter-end adjustments to corporate-level reserves that were not adequately documented and that did not memorialize a sufficient basis for the adjustments. The corporate-level reserves included termite, legal/environmental, casualty, medical, bad debt, and outside services.
During this period, Rollins lacked sufficient internal accounting controls over (a) reserves for medical, casualty, bad debt, litigation, environmental and termite expenses, (b) manual journal entries, and (c) period-end adjustments made during the closing process. Although Rollins had policies and procedures requiring accounting entries to have adequate supporting documentation, its finance staff recorded manual journal entries with no or inadequate supporting documentation. Rollins also lacked procedures to ensure that the accounting personnel received necessary information to properly record and document quarter-end reserve adjustments. Finally, Rollins did not maintain a sufficient complement of personnel with the requisite level of accounting knowledge, experience, and training.
As a result, Rollins’ internal accounting controls were not designed or maintained to provide reasonable assurance that Rollins’ financial statements would be presented in conformity with GAAP, and it further failed to maintain internal control over financial reporting. Rollins’s books, records, and accounts also did not accurately and fairly reflect, in reasonable detail, Rollins’ transactions and disposition of assets.”
Based on the above, the SEC found that Rollins violated, among other legal provisions, the FCPA’s books and records and internal controls provisions. In addition, the SEC found that Northern, among other things, caused the violations.
Without admitting or denying the SEC’s findings, Rollins agreed to pay an $8 million civil monetary penalty and Northern agreed to pay a $100,000 civil monetary penalty.