Dive Brief:
- The Securities and Exchange Commission issued a cease and desist order to managed network provider GTT for overstating its operating income but let the company go without a penalty because it voluntarily disclosed and tried to resolve the accounting problems it was having that led to the reporting inaccuracies.
- “At a time when it was still evaluating the nature and impact of the accounting issues it had identified, GTT self-reported to the SEC and followed up by providing substantial cooperation throughout our investigation while taking significant steps to address the shortcomings in its processes,” Mark Cave, associate director of the SEC’s enforcement division, said in a statement.
- Both the SEC and the Department of Justice have been pushing companies to self-disclose problems as soon as they’re discovered and waiving all or a portion of penalty amounts in exchange for companies making the effort.
Dive Insight:
GTT’s problems in part stem from differences between the data the company’s accounting team uses to report its cost of revenue and the data its operations team inputs into its third-party bill processing system, the SEC said.
The differences largely result from difficulties the company had integrating accounting systems after a series of acquisitions. Between 2017 and 2018, the company brought on board eight companies, several of them distressed and based outside the United States, more than doubling its revenue and expenses.
“Employees were overwhelmed by the increased volume of data and transactions,” the SEC said, “and they struggled to successfully integrate certain of these newly acquired companies into GTT’s systems.”
As a result of its data problems, the company made an unsupported adjustment of $5.6 million from its income statement to a prepaid cost-of-revenue account in 2019, increasing its operating income by approximately 23% and decreasing its net loss before income taxes by 17% in its third quarter financial reports.
It also made an unsupported $16 million vendor dispute adjustment in the following quarter, based on a change in its win-rate assumption for disputed invoices. “The adjustment lacked reasonable support because … it was based on unverified data,” the SEC said.
The adjustment amount had a material impact on the company’s 2019 financial statements for the year by increasing its operating income by 15% and decreasing its net loss before income taxes by 13%.
Two other unsupported adjustments were made, in the first quarter of 2020, stemming from the same data problem with its win-rate assumption for disputed invoices, resulting in increased operating income by almost 200% and decreased net losses before income taxes by 18% for the quarter.
The company filed for bankruptcy in October 2021 and emerged from the process in December 2022 as a private company, enabling it to use fresh-start reporting to present its assets, liabilities and equity as a new entity.
“GTT … spent more than a year and tens of millions of dollars in an attempt to correct its filings, but ultimately suspended its efforts to restate due in part to the complexity of reconciling the two operational systems that were producing inconsistent information,” the SEC said.
The company’s unsupported adjustments in 2019 and 2020 resulted in violations of federal reporting and control requirements, but the SEC said it’s not imposing a civil penalty because of the company’s self-disclosure and effort to solve the problem.
The company “voluntarily undertook affirmative remedial measures in response to the issues discovered, which included attempting to rebuild its [cost of revenue] accounts, replacing certain members of management, its board of directors, and its auditor, and overhauling its accounting function,” the SEC said.
