by Michael Connor
Diebold Inc. agreed to pay $25 million to settle Securities and Exchange Commission charges that it manipulated its earnings from at least 2002 through 2007 to meet financial performance forecasts, misstating the company’s reported pre-tax earnings by at least $127 million.
The SEC also filed and settled a separate “enforcement action” against former Diebold chief executive officer Walden O’Dell, who was not charged with any fraud. In an application of the “clawback” provisions of the Sarbanes-Oxley Act of 2002, O’Dell agreed to reimburse the company $470,016 in cash bonuses, 30,000 shares of Diebold stock, and stock options for 85,000 shares of Diebold stock.
SEC civil charges were filed, and remain outstanding, against three former financial managers at the Ohio-based maker of ATMs, bank security systems and voting machines: former CFO Gregory Geswein, former Controller and later CFO Kevin Krakora, and former Director of Corporate Accounting Sandra Miller.
According to the government, Diebold’s financial management received “flash reports” — sometimes on a daily basis — comparing the company’s actual earnings to analyst earnings forecasts. Diebold’s financial management prepared “opportunity lists” of ways to close the gap between the company’s actual financial results and analyst forecasts. Many of the opportunities on these lists were fraudulent accounting transactions designed to improperly recognize revenue or otherwise inflate Diebold’s financial performance.
The list of fraudulent practices cited by the SEC included improper use of “bill and hold” accounting; recognition of revenue on a lease agreement subject to a side buy-back agreement; manipulating reserves and accruals; improperly delaying and capitalizing expenses; and writing up the value of used inventory.
“Diebold’s financial executives borrowed from many different chapters of the deceptive accounting playbook to fraudulently boost the company’s bottom line,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “When executives disregard their professional obligations to investors, both they and their companies face significant legal consequences.”
Scott W. Friestad, Associate Director of the SEC’s Division of Enforcement, added, “Section 304 of Sarbanes-Oxley is an important investor protection provision because it encourages senior management to proactively take steps to prevent fraudulent schemes from happening on their watch. We will continue to seek reimbursement of bonuses and other incentive compensation from CEOs and CFOs in appropriate cases.”
In a statement, Diebold confirmed the SEC settlement and said it had been informed by the U.S. Attorney’s Office for the Northern District of Ohio that no criminal charges will be brought against the company.
Photo by andresmh, courtesy of Flickr.