Controller Charged in Revenue Recognition Scheme

By Vincent Ryan for CFO.com

Are a disproportionate amount of your company’s sales taking place in the last days of a quarter? Are sales credit limits being frequently overridden? Are some customers being granted significantly extended payment terms, as long as 180 days from the invoice date?

While this was happening at Maxwell Technologies a few years ago, according to the Securities and Exchange Commission, finance was asleep at the wheel.

On Tuesday, the SEC charged the energy storage and power delivery product manufacturer and one of its former sales executives in a fraudulent revenue recognition scheme designed to inflate the company’s reported financial results. The fraud took place from December 2011 through January 2013.

To meet sales goals for a new product, ultracapacitors, sales executive Van Andrews used several improper tactics, says the SEC, including customer side deals with contingent payment terms and full right of return; channel stuffing; extended payment terms; and falsified purchase orders. Andrews also allegedly instructed certain distributors to order product “they neither wanted nor needed at quarter-end.”

“The fraud created the misperception that Maxwell’s ultracapacitor growth was far more successful than reality,” according to the SEC’s order.

Andrews also falsified records in order to conceal the scheme from Maxwell’s finance and accounting personnel and external auditors, the SEC says. However, former CEO David Schramm and former controller James DeWitt were charged because they “failed to adequately to respond to red flags that should have alerted them to the misconduct,” among them the company’s ballooning days sales outstanding.

“Maxwell ultimately recorded $19 million in revenue despite the fact that it should have known the sales terms were not fixed and determinable as required by GAAP for revenue recognition,” the SEC says.

Both Maxwell and Andrews consented to the SEC’s order without admitting or denying the allegations and agreed to pay penalties of $2.8 million and $50,000, respectively. Andrews also agreed to be barred from serving as an officer or director of a public company for five years.  Without admitting or denying the SEC’s findings, Schramm agreed to pay a total of nearly $80,000 in disgorgement, prejudgment interest, and penalty and DeWitt agreed to pay a $20,000 penalty.

Maxwell’s former CFO Kevin Royal, who stepped down in 2015, was not charged. (The SEC declined to comment further. )

However, Royal chose to reimburse the company $135,800 for incentive-based compensation he received during the period when the company was found to have committed accounting violations.

The SEC says all the money collected in this proceeding will be used to establish a fund for the benefit of investors harmed by the accounting fraud.

Maxwell Technologies is actually a repeat offender. In January 2011, it paid approximately $14.3 million to settle Exchange Act Section 13(a) and Foreign Corrupt Practices Act-related charges with the SEC and the United States Department of Justice.

This more recent violation was unveiled in early 2013. Maxwell initiated an internal investigation after its audit committee received a detailed internal whistleblower letter describing the revenue recognition fraud.