Informix adminact,
how to cook the books (1994 - 1996):
"At the end of the fourth quarter of 1995, the "bank" reseller had $5 million of unsold licenses it had committed to purchase and was reluctant to enter
into an additional commitment. The reseller, which was also a computer equipment distributor, agreed to an additional $2.5 million commitment only after
Company employees agreed to a $2 million purchase of computer hardware, including obsolete equipment that Company employees understood the
reseller otherwise would have to write-off.
sec.gov
C. Facts
Prior to the quarter ended March 30, 1997, the Company regularly characterized itself in press releases as the fastest growing company in the database
software industry. In reality, its apparent growth in revenues and earnings largely was the result of the use of a multitude of fraudulent and other improper
practices. As a result of these practices by former managers and employees, the Company's filings with the Commission were materially false and
misleading.
1. Use of Fraudulent Practices To Inflate Revenues and Earnings
The fraudulent conduct described herein was driven by some former managers' perceived need to meet or exceed the Company's internal revenue and
earnings goals, which were based, in part, on financial analysts' expectations. As it became increasingly difficult to achieve these goals, some former
managers and other employees increased their reliance on fraudulent and other practices to inflate reported revenues and earnings.
a. Backdating Agreements
As the end of each quarter neared, Company sales personnel routinely rushed to conclude as many transactions as possible to meet revenue and
earnings goals for that quarter. In numerous instances, however, they were unable to complete negotiations and obtain signed license agreements from
customers prior to quarter-end, as required for revenue recognition under GAAP.5 Notwithstanding the Company's written policy that revenue on
license agreements should not be recognized unless the agreements were signed and dated before quarter-end, there was an accepted practice of signing
license agreements after quarter-end and then backdating them to appear as if they had been executed prior to quarter-end. By engaging in this conduct,
former management and others fraudulently inflated quarterly and annual revenues and earnings.
The Company had inadequate controls for determining whether, or ensuring that, software license agreements had been negotiated and signed by both
parties in the quarter in which revenue was recognized. The dating of signatures on agreements was essentially controlled by salespersons, who were
under constant pressure to meet quarterly sales goals. The Company had no requirement for signed agreements to be submitted at or before
quarter-end, and the Company regularly accepted agreements submitted several days thereafter for revenue recognition. In at least one instance, the
Company recognized revenue on an agreement that was not signed until approximately one month after the end of the quarter.
b. Use of Side Agreements
Former sales personnel, managers, and others at the Company used a variety of written and oral side agreements with customers as a means to inflate
revenues and earnings. The terms of the side agreements varied and included provisions
(1) allowing resellers to return and to receive a refund or credit for unsold licenses;
(2) committing the Company to use its own sales force to find customers for resellers;
(3) offering to assign future end-user orders to resellers;
(4) extending payment dates beyond twelve months; 6
(5) committing the Company to purchase computer hardware or services from customers under terms that effectively refunded all, or a
substantial portion, of the license fees paid by the customer;
(6) diverting the Company's own future service revenues to customers as a means of refunding their license fees; and
(7) paying fictitious consulting or other fees to customers to be repaid to the Company as license fees.
....
In the restatement process, the Company and its auditors identified $114 million of accounting irregularities in 1995 and 1996 involving more than a
hundred transactions, mostly with resellers. Because the irregularities relating to reseller purchase commitments were so pervasive, the Company and its
auditors determined that all such transactions for the three-year period ended in 1996 should be restated to defer revenue recognition until the resellers
resold the licenses to end-users. After making this determination, the Company no longer attempted specifically to identify irregularities involving
resellers, although additional irregularities subsequently were discovered. In November 1997, the Company filed restated annual financial statements for
fiscal years 1994, 1995, and 1996 and restated quarterly financial statements for each interim quarter of 1996 and the first quarter of 1997. The
restatements had a material effect on previously reported annual operating results:
Net Revenues
(millions)
Net Income
(millions)
Originally
Reported
As
Restated
%
Overstated
Originally
Reported
As
Restated
%
Overstated
1996
$939.3
$727.8
+29%
$97.8
$(73.6)
+233%
1995 4
$714.2
$632.8
+13%
$97.6
$38.6
+153%
1994
$470.1
$452.0
+4%
$61.9
$48.3
+28%
The restatements also significantly affected the Company's previously reported quarterly revenues and earnings for 1996 and the first quarter of 1997:
Net Revenues
(millions)
Net Income
(millions)
Originally
Reported
As
Restated
%
Misstated
Originally
Reported
As
Restated
%
Misstated
Q1'96
$204.0
$164.6
+24%
$15.9
$(15.4)
+203%
Q2'96
$226.3
$159.3
+42%
$21.6
$(34.1)
+163%
Q3'96
$238.2
$187.1
+27%
$26.2
$(17.1)
+253%
Q4'96
$270.8
$216.8
+25%
$34.1
$(7.0)
+587%
Q1'97
$133.7
$149.2
- 10%
$(140.1)
$(141.4)
- 1%
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