SEC Settles Financial Fraud Action – With Admissions In The U.K.
The Commission has settled one action in which admissions were required since Jay Clayton became Chairman. In resolving its most recent financial fraud action the agency did not require the settling parties to make admissions of fact. The settlement was entered pursuant to an offer of settlement by the two individual Respondents without specifying the basis, except for the standard express admission as to jurisdiction. In the text of the Order instituting the administrative proceedings, however, it states that each settling Respondent admitted their role in the financial fraud in resolving matters with the U.K.’s Financial Reporting Council or FRC. In the Matter of Philip John James, CA, Adm. Proc. File No. 3-18431 (April 9, 2018).
The Order names as Respondents two former employees of Computer 2000 Distribution Limited, the U.K. subsidiary of Tech Data Corporation, a U.S. public company. They are chartered accountants Philip James, Finance Director, and Kevin Silverwood, Financial Management Controller.
The Order centers on a financial fraud that took place in 2012 and 2013 in the U.K. subsidiary whose results were consolidated with those of the parent for financial reporting. In the third quarter of fiscal 2012 Respondents learned that $5 million in aged receivables were uncollectable. Rather than writing them off as required by GAAP and reducing the earnings Respondents moved the amount to an unrelated liability account.
In the third quarter of fiscal 2013 the two accountants also caused the financial results to be falsely overstated. During the quarter Respondents James and Silverwood learned that the expenses were higher than expected. To improve results they transferred over $3 million in costs to the same balance sheet account used the prior year. They also failed to write off about $650,000 in receivables from a vendor despite the fact that each knew the amounts were uncollectable.
In the fourth quarter of 2013 the two men took four steps which fraudulently improved the firm’s financial results. First, they failed to record about $750,000 in foreign exchange losses. Second, they prematurely recognized about $750,00 in rebates. Third, Respondents transferred over $350,000 in costs to the same balance sheet account they had previously used. Finally, they failed to write off two uncollectable receivables totaling $2.2 million.
To conceal their conduct the two accountants falsified the reconciliation by altering the amounts on certain spreadsheets in the accounting system. The false reconciliation was furnished to the auditors. The Order alleges violations of Exchange Act sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5).
Previously, each Respondent settled with the FRC. Mr. James admitted his misconduct and paid a fine of £35,625 (about $46,300). He is suspended from acting as a chartered account for 10 years. Mr. Silverwood fully admitted to his conduct in resolving the matter. He paid a fine of £11,250 (about $14,850) and is precluded from acting as a chartered accountant for four years.
To resolve the proceedings with the Commission each Respondent consented to the entry of a cease and desist order based on the sections cited in the Order. Mr. James is prohibited from serving as an officer or director of an issuer. Mr. Silverwood is also precluded from serving in such a capacity but for five years. Both are denied the privilege of appearing and practicing before the Commission as an accountant. Mr. Silverwood may request reinstatement after five years. Finally, Mr. James is directed to pay disgorgement of $22,500 along with prejudgment interest of $4,200. Mr. Silverwood is directed to pay disgorgement of $2,100 and prejudgment interest of $395. The financial obligation for each man is deemed paid by the amounts remitted to the FRC. The Commission chose not to impose penalties in view of the actions of the FRC.