Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Thursday, July 19, 2007

Former SmartForce Officers and Former Outside Auditior Settle SEC Accounting Charges

The SEC today brought settled enforcement actions against four former executives at SmartForce PLC, the company's former outside auditor, and its former audit engagement partner in connection with the software company's overstatement of revenue by $113.6 million and net income by $127 million during a 3½-year period ending in mid-2002.  According to the complaint, the financial statements of SmartForce, which has since merged into SkillSoft PLC., failed to comply with generally accepted accounting principles (GAAP) by, among other things, recognizing revenue improperly from various types of transactions in which the company engaged, including multiple-element arrangements, reciprocal transactions, and reseller agreements.

The Commission instituted both administrative and civil actions against former SmartForce Chief Financial Officer David C. Drummond and two former vice presidents of finance, Patrick E. Murphy and John P. Hayes. The Commission filed an injunctive action against Patrick T. Chew, former controller of SmartForce's subsidiary in the United States ("SmartForce US"). The four former SmartForce executives will pay a total of $2.3 million in disgorgement, interest, and penalties.

The Commission also instituted proceedings against Ernst & Young Chartered Accountants and the lead partner on the SmartForce engagement, Denis O'Hogan, for engaging in improper professional conduct in connection with multiple audits and periodic reviews of SmartForce's financial statements. Ernst & Young Chartered Accountants were censured and agreed to pay $725,000, an amount equal to its audit fees.

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