The SEC is taking renewed aim at earnings management, and this time it’s not just improper revenue recognition.
Both in its recent enforcement order against Marvell Technology Group – imposing s $5.5 million fine and a cease-and-desist order – and in its on-going action against Under Armour, the SEC has focused on what, anecdotally, is not a terribly uncommon practice – accelerating (or “pulling in”) sales from a future quarter to the present in order to “close the gap between actual and forecasted revenue.” In both cases, the schemes consisted of offering various incentives, such as “price rebates, discounted prices, free products, and extended payment terms” to entice customers to accept products in the current quarter that they would not need until the next. In an environment of declining sales, these inorganic efforts to meet earnings numbers allegedly misled the market about the direction of the business.
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This article was republished by the Harvard Law School Forum on Corporate Governance and Financial Regulation.