-
SEC Announces Settled Enforcement Action Alleging Management Of Earnings Figures To Meet Analyst Estimates
04/27/2022On April 18, 2022, the SEC announced it had reached an $8 million settlement with Rollins Inc. (“Rollins”), a nationwide pest control services company, and its CFO for allegedly engaging in improper accounting practices to boost quarterly earnings per share (“EPS”) to meet consensus quarterly estimates. The SEC found that the CFO directed the company to make certain adjustments to its records in multiple quarters without performing a generally accepted accounting principles (“GAAP”) analysis or memorializing the basis for the changes. The changes allegedly caused the EPS to go up a penny, allowing the company to meet analysts’ consensus estimates, and the company often publicly touted the consistency of its earnings growth in its press releases and public filings. Under terms of the settlement, Rollins neither admitted nor denied the SEC's findings and agreed to pay an $8 million civil penalty, while the CFO agreed to pay a $100,000 civil penalty. However, the action was brought under Section 17(a)(2) of the Securities Act of 1933 as opposed to Section 10(b) of the Exchange Act of 1934, and although both the company and CFO agreed to the entry of a cease-and-desist order, the CFO was not required to agree to an officer or director bar.
According to the SEC’s order, each quarter, Rollins made a determination as to the appropriate amount to reserve (or accrue) for several different categories of liability accounts. Any adjustments to the amount of a reserve had a direct impact on Rollins’ net income and the company’s reported EPS. The SEC alleged that in the first quarter of 2016 and the second quarter of 2017, Rollins made unwarranted reductions to its accounting reserves to allow the company to round up its reported EPS to the next cent. As a result, the SEC claimed that 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. Specifically, Rollins publicly reported in its Form 10-Q for the first quarter of 2016 and in its earnings release an EPS of $0.15, but the SEC contended that without the unsupported reductions to reserves, Rollins would have reported EPS of $0.14, one penny less than EPS estimates. Similarly, the SEC claimed that in July 2017, the CFO directed a $1 million reduction in a reserve account, which increased Rollins’ income and showed that Rollins’ EPS was $0.2462, which rounded up to $0.25. As a result, Rollins publicly reported in its Form 10-Q for the second quarter of 2017 and in its earnings release an EPS of $0.25.
The SEC found that Rollins made other accounting entries that were not supported by adequate documentation in multiple additional quarters from 2016 through 2018 and that there was an overall environment of insufficient internal accounting controls, which resulted in violations of federal securities laws. But it is notable that the SEC elected not to charge a violation of Section 10(b), or otherwise accuse the company or the CFO of acting with scienter.
In announcing the action, the SEC noted that it was part of the SEC’s Earnings Per Share Initiative, which uses data analytics to detect potential accounting and disclosure violations. Notwithstanding the lack of scienter alleged, the action is the highest penalty to date against an issuer in connection with the EPS Initiative.
