Healthcare company and its finance officers fined for misleading accounting

Dive Brief:

The Securities and Exchange Commission (SEC) hit Healthcare Services Group with a $6 million settlement charge for inflating its quarterly earnings per share (EPS) to align with analyst estimates. The CFO and controller were also hit with settlement charges.
The SEC said it deployed its EPS initiative, which uses risk-based data analyses to uncover accounting and disclosure violations, to spot the violations.
"As today's actions demonstrate, we will continue to leverage our in-house data analytic capabilities to identify improper accounting and disclosure practices that mask volatility in financial performance,” said Gurbir Grewal, the SEC's enforcement chief.

Dive Insight:

Healthcare Services Group provides housekeeping, dining, and other services to healthcare facilities. In 2014-15, it failed to account for material loss contingencies related to the settlement of private litigation against it, the SEC said.

By failing to record the loss contingencies, as required by generally accepted accounting practices (GAAP), the company reported EPS that met, or came close to meeting, research analysts’ consensus estimates.

Instead of reducing its income by recording the loss contingencies, the company reported multiple quarters of EPS growth.

The SEC singled out the company’s CFO at the time, John Shea, for failing to manage the loss contingencies properly.

The company’s controller, Derya Warner, was also called out, for making accounting entries that weren’t supported by the company’s own documentation policies.

“Despite mounting evidence that such liability was probable and reasonably estimable,” Anita Bandy, the SEC’s associate director of enforcement, said, the company “repeatedly failed to record [the] loss contingencies.”

That led to the company misleading investors by reporting inflated net income and consistent EPS growth.

The order said Shea caused the company’s Securities Act violations and Warner caused its books and records and internal controls violations.

In addition to the $6 million settlement charge imposed on the company, the SEC charged Shea $50,000, and Warner $10,000, to settle.

Shea is suspended from practicing before the SEC as an accountant, which prevents him from reporting for, or auditing, public companies, although he can apply for reinstatement after two years.