SEC fines Canadian Solar, Zhuang $550,000 (U.S.)
2014-12-16 12:15 ET - Street Wire
Also Street Wire (U-*SEC) U S Securities and Exchange Commission
Also Street Wire (U-CSIQ) Canadian Solar Inc
by Mike Caswell
The U.S. Securities and Exchange Commission has imposed $550,000 in fines on Nasdaq-listed Canadian Solar Inc. and its senior vice-president, Yan Zhuang, for improperly reporting millions of dollars in revenue. (All figures are in U.S. dollars.) The SEC claims that the company included dubious amounts in its 2009 financial statements from solar module sales in California. Ultimately some of the money proved uncollectible while other amounts were for product that was in storage, the SEC says.
The penalties are contained in an administrative order the SEC filed on Monday, Dec. 15. Of the $550,000 fine, Canadian Solar must pay $500,000 and Mr. Zhuang must pay $50,000. The SEC has also ordered that the company and Mr. Zhuang not commit any future violations. The sanctions represent a negotiated settlement, in which Canadian Solar and Mr. Zhuang did not admit to any wrongdoing.
 | | CDN SOLAR | | Yan Zhuang |
The penalties mark the first time the SEC has targeted Canadian Solar, an Ontario company that builds solar panels in China. The regulator's concerns stem from the company's expansion to the U.S. from its main market in Europe. In 2009, Canadian Solar entered into a distributorship agreement in California and opened an office there. It reported in a news release that it anticipated "substantial growth" from the U.S. that year.
On paper at least, substantial growth is what appeared to occur. For the third and fourth quarters of 2009 the company reported U.S. sales of $12.9-million and $24.8-million. The depiction, however, was entirely inaccurate, the SEC claims. According to Monday's order, the company recorded revenues during the year that "failed to meet all of the criteria for revenue recognition."
Included in these figures were orders from a California solar power contractor that Canadian Solar expected would total $7.7-million. The contractor was supplying two large-scale municipal projects, but there were substantial doubts it could pay for the modules it required, the order states. The contractor did not have enough money to cover the costs and it had poor credit. Mr. Zhuang acknowledged this was troublesome, writing in an internal communication: "They are very short money. They are not confident they can pay us on November 1st and not confident enough to find money to finish the project."
Despite those issues, Canadian Solar shipped $2.4-million worth of panels and improperly recognized the money as revenue, the SEC says. Negotiations with the contractor later fell apart. Even though Canadian Solar had reported the sales in its financial results, the money proved uncollectible, the SEC claims. As a result, Canadian Solar had to repossess all of the modules it had shipped.
That same year, Canadian Solar sent solar modules to a California distributor and improperly recognized the product as being sold, even though much of it was simply sitting in storage, the SEC says. Canadian Solar had entered into an agreement with the distributor in which it did not require the distributor to pay for the modules until a customer purchased them. The problem, as described by the SEC, was that the distributor was unable to sell all of the modules. The result was that the distributor ended up storing the product while Canadian Solar had already reported it as third quarter revenue, the order states.
The amount of product sitting became substantial enough that at one point Canadian Solar agreed to pay storage fees to the distributor, the SEC says. This in turn became another accounting issue because the storage fees appeared on purchase orders. Having a storage fee on the purchase orders made it impossible to recognize the amounts as sales, so Mr. Zhuang had the distributor enter a separate contract for storage, according to the SEC.
The SEC's order does not say if the distributor managed to sell the product. It does state that Canadian Solar had to restate its results for the fourth quarter of 2009, reducing its U.S. revenue to $5.3-million from $24.8-million.
In legal terms, the SEC's order cites Canadian Solar and Mr. Zhuang for violations of accounting rules. The company should have maintained a system of internal controls to ensure it was following generally accepted accounting principals. In accepting the settlement, the SEC considered what it describes as "remedial acts" the company has since taken. |
