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SEC Levies Half-Million Dollar Fine For Self-Reported Accounting Errors
11/14/2016On November 7, 2016, the Securities and Exchange Commission (“SEC”) instituted a settled administrative proceeding against PowerSecure International (“PowerSecure”) that alleged that the company violated the financial reporting, books and records, and internal control provisions of the federal securities laws by failing to accurately identify and disclose segment-level operating results from 2012 to 2014, as required by Generally Accepted Accounting Principles (“GAAP”). PowerSecure, which neither admitted nor denied the SEC’s findings, agreed to pay a $470,000 civil monetary penalty to settle the SEC’s claims, which did not include any allegation of scienter or fraud. In the Matter of PowerSecure, Int’l, Admin. Proc. No. 3-17670 (Nov. 7, 2016).
Section 13 of the Securities Exchange Act of 1934 generally requires that financial statements conform to GAAP, which comprise principles articulated by the Financial Accounting Standards Board (“FASB”). FASB’s Accounting Standards Codification 280 (“ASC 280”) provides the standard for operating segment reporting under GAAP. Under ASC 280, an operating segment is a component of a public entity (i) that engages in business activities that earn revenues and incur expenses; (ii) that produces operating results that are regularly reviewed by a decision maker who assesses performance and decides which resources to allocate to the segment; and (iii) for which discrete financial information is available. Operating segments may be aggregated into a single “reportable segment” if aggregation is consistent with the objective and basic principles of ASC 280, the segments have similar economic characteristics, and the segments have similar products or services, production processes, customer types, distribution methods, and regulatory environment.
According to the SEC, PowerSecure, an energy management firm and subsidiary of Atlanta-based power company Southern Company, disclosed two operating segments in 2012, “Utility & Energy Technologies” and “Energy Services.” In 2013 and 2014, the company only disclosed the Utility & Energy Technologies segment. PowerSecure allegedly decided to report only one segment in 2013 and 2014 because it reasoned that there was no discrete financial information available below the level of Utility & Energy Technologies. The SEC, however, alleged that PowerSecure’s CEO received financial results on a less aggregated level and met with the leaders of PowerSecure’s business units to discuss sales forecasts and financial performance. Given these findings, the Commission reasoned that PowerSecure should have instead reported seven operating segments, including “Energy Efficiency Services,” “Solar,” and “Distributed Generation.” The SEC claimed that, by failing to disclose segment-level financial results for these segments, PowerSecure did not properly apply ASC 280.
The SEC’s decision to bring a proceeding against PowerSecure underscores the granular level at which the SEC is willing to second-guess a company’s financial disclosures through enforcement actions. Indeed, the $470,000 fine is a warning to filers that the Commission will not hesitate to seek public sanctions even for judgment-based accounting decisions with which it disagrees. The Commission did not allege that PowerSecure’s disclosure choices caused any harm to investors or were made with an improper motive, and PowerSecure had previously revised its disclosures (and acknowledged a material weakness) in 2015 after discussing the issue with Commission staff. Nevertheless, the Commission imposed the fine after speculating that the lack of segment detail might have caused the company to fail to record an impairment of goodwill and might have caused investors to overlook certain indicators of an unexpected loss in 2014.
