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US engine manufacturer penalised by the SEC for innacurate accounts with shades of ENRON

Editorial Staff

The USA's Securities and Exchange Commission as done a deal with Power Solutions International Inc. of Chicago to "settle accounting fraud" allegations related to the company's overstatement of revenues by almost USD25 million.

It's not a criminal case so technically they are not "charges" which is how the SEC refers to them. And there's no judgment because the case didn't go to court. So the term "Order" is an administrative not a judicial document of record. Also, while the buzz is about "accounting fraud" the "fraud" was not the offence which the SEC proceeded with - that was filing misstated accounts.

Having cleared that up, the case is interesting: remember ENRON, anyone?

This is how the SEC phrases it: "According to the SEC's order, Power Solutions fraudulently recorded revenue in several circumstances that were not in accordance with U.S. generally accepted accounting principles. For example, the order finds that Power Solutions recorded revenue for purported sales of products that were not complete, for products that the customer had not agreed to accept, for products for which the price was falsely inflated, and for improper "bill and hold" arrangements. The order finds that, as a result of its fraud, Power Solutions issued materially misstated financial statements in its public filings from the fourth quarter of 2014 through the fourth quarter of 2015. "

So, the actual thing that the SEC was concerned with is "materially misstated financial statements." Motive is a reason but it is not an "offence."

In his book " Making Accounting Policy " David Solomon, big at one of the bit accounting firms and at the Accounting Standards Board which amongst other things is largely responsible for the USA's Generally Accepted Accounting Principles, set out the idea of booking as "revenue" sales which were not yet completed. That was a core issue in the Enron accounting system. If one looks at what Power Solutions was found to be doing, there is a clear similarity to the Enron conduct in which contracted but not completed sales were booked as revenue.

"The SEC's order finds that Power Solutions [breached] the anti[-]fraud, books and records, reporting and internal accounting controls provisions of the federal securities laws. Power Solutions agreed to cease and desist from future [breaches] of these provisions, pay a [USD]1.7 million civil penalty and comply with an undertaking to remediate deficiencies in its internal controls over financial reporting.

"Separately, the U.S. Attorney's Office for the Northern District of Illinois today announced a non-prosecution agreement with Power Solutions related to the same misconduct."

That last sentence is important: it shows that the SEC in concert with the Department of Justice agreed that the company would not be prosecuted because it agreed to pay to the SEC a penalty which is not a fine.

Is the SEC, in concert with the DoJ, soliciting a bribe? The conduct certainly falls within the normal definition of a bribe and the only saving grace is that the USA permits such conduct.

What is even more fascinating is that the SEC did in fact issue proceedings (still not charges) against two executives of the company and they were heard in Federal Court. The original document is here: https://www.sec.gov/litigation...

"Gary Winemaster, Power Solutions International Inc.’s former CEO, and two former senior sales executives, Craig Davis and James Needham, caused Power Solutions to fraudulently record revenue for purported sales of products that were not complete, that the customer had not agreed to accept, for which the price was falsely inflated, and from improper “bill and hold” arrangements. The SEC further alleges that the defendants misled and concealed key information from Power Solutions’ internal accounting personnel and external auditor. "

The in 2019, the SEC said "The SEC’s complaint charges the defendants with [breaching] various anti[-]fraud, books and records, reporting and internal controls provisions of the federal securities laws as well as with aiding and abetting [breaches]. The complaint seeks permanent injunctions and penalties against all defendants, [surrender of profits] and pre[-]judgment interest against Needham, an officer-and-director bar against Winemaster and a clawback of incentive-related compensation paid to Winemaster during the alleged fraud."

So, it's a civil action making allegations, not "charging..with." But... "The U.S. Attorney’s Office for the Northern District of Illinois filed criminal charges against the defendants for related misconduct." That was all in July 2019. What happened to that case? The SEC makes no further mention of it. If (and we can't confirm or deny this) it went away when the penalty was paid by the company, that raises issues of improper use of the company's funds.

In 2017, the company was turfed out of NASDAQ for failing to keep its filings up to date and fell back to being traded over the counter in the Pink Sheets.

The case also, incidentally, demonstrates that "generally accepted" is regarded, when the SEC considers it appropriate, to mean "compulsory." If that is not so, then in the ordinary use of English, "generally accepted" means that there are choices.

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