Lack of a Penalty and Fraud Charges in Financial Fraud Case May Stem From Cooperation

The SEC announced the filing of a settled enforcement action centered on a pervasive corporate accounting fraud. The settlement appears to bring into play the SEC’s policies on corporate penalties and cooperation. The settled civil injunctive action was filed against New Jersey based BISYS Group, Inc., a leading provider of products and support services to financial institutions such as insurance companies, banks and mutual funds. According to the SEC’s complaint the company repeatedly utilized improper accounting techniques over a period of years to inflate its income. Those actions resulted from what the complaint called an improper focus on meeting Wall Street expectations and lax internal controls in one division which experienced rapid growth, largely through acquisition.

The SEC’s complaint details a series of improper accounting practices primarily in one division but also found in other areas which occurred from at least July 2000 through December 2003. As a result the company’s reported financial results were overstated for the fiscal years ended June 30, 2001, 2002 and 2003 by about $180 million. Based on two restatements of its financial statements, BISYS overstated pretax income by 69%, 58% and 43% for fiscal years 2001, 2002 and 2003 respectively. For the same periods the company overstated EPS by 73%, 62% and 46%. The complaint alleges that the company inflated its income through an improper focus on meeting Wall Street expectations and lax internal controls in its insurance services division which experienced rapid growth during the period. The company used a variety of improper accounting practices to inflate its income, including:


–Improperly recording commissions previously earned by an acquired company, but not yet paid, as its own revenue, contrary to GAAP and its own revenue recognition policies; 

–Not adequately reserving against a substantial aging receivable balance;

–Improperly accounting for renewal commissions;

–Improperly accounting for bonus commissions;

–Increasing the rate at which commissions were accrued on certain products;

–Booking unsupported revenue entries with offsetting expense accruals toward the end of a quarter; and

–Failing to maintain proper internal controls in its insurance division


BISYS profited by over $19.6 million thought he sale of convertible notes and the issuance of stock and options either for cash or in acquisitions at an inflated price according to the complaint. The action was settled with the entry of a statutory injunction prohibiting future violations of the books, records and internal control provisions of the federal securities laws and the payment of approximately $25 million in disgorgement and prejudgment interest. 

What is perhaps most notable about this case is what was omitted from the settlement. First, the SEC did not allege violations of the antifraud provisions despite what appears to be the pervasive nature of the scheme and the involvement of top management. In addition the SEC did not impose a penalty on the company. Under its announced policies on corporate penalties a key consideration is whether the company profited from the improper acts. This may have resulted from the cooperation of the company which the SEC acknowledged in its press release, although it did not detail what was entailed.