Thursday, February 22, 2007
Veritas Software Corp. settled an SEC securities fraud action alleging that the company engaged in accounting fraud, including round-trip transactions with AOL to increase revenues. The company, which was acquired by Symantec Corp. in 2005, was also accused of smoothing out its earning through "cookie jar" accounts to keep up the appearance that revenue and earnings were not fluctuating, which is anathema to Wall Street. The SEC Litigation Release (here) describes the accounting problems:
- In the fourth quarter of 2000, Veritas artificially inflated reported revenues in connection with a $20 million transaction with AOL and smaller transactions with two other Internet companies. In the three round-trip transactions, Veritas agreed to "buy" online advertising in exchange for the customer's agreement to purchase software from Veritas at inflated prices. To conceal the true nature of the AOL transaction, the company structured and documented the round-trip as if it was two separate, bona fide transactions, conducted at arm's length and reflecting each party's independent business purpose. In addition, the company lied to and withheld material information from its independent auditors about the AOL transaction and the other two transactions.
- AOL improperly recognized revenue on the round-trip transaction and reported materially misstated financial results to its own investors. Through its conduct, Veritas aided and abetted AOL's fraud.
- During 2000 through 2002, Veritas engaged in three improper accounting practices to manage its earnings and artificially smooth its financial results. Specifically, Veritas improperly (a) recorded and maintained excess accrued liabilities, employing "accrual wish lists" and "cushion schedules"; (b) stopped recognizing professional service revenue it had fully delivered and earned upon reaching internal targets; and (c) inflated its deferred revenue balance. As with the round-trips, the company took concerted steps to conceal these improper practices from its independent auditors.
In addition to the usual "sin-no-more" injunction, which will have little effect because Veritas has disappeared, the company will pay a $30 million civil penalty. (ph)