Risk & Compliance

MagnaChip Fined $3M Over Accounting Fraud

The Korean chipmaker and its ex-CFO allegedly engaged in "accounting tricks" to meet revenue and gross margin targets after it went public.
Matthew HellerMay 2, 2017
MagnaChip Fined $3M Over Accounting Fraud

South Korea-based MagnaChip Semiconductor Corp. and its former CFO have agreed to pay more than $3 million to settle U.S. charges that the company engaged in a “panoply of accounting tricks” to meet financial targets after it went public in 2011.

The U.S. Securities and Exchange Commission said the chip maker’s top executives put employees under “immense pressure,” setting aggressive revenue and gross margin targets and, in several instances when employees objected to the targets, refusing to lower them.

As a result, the SEC said in an administrative order, employees “resorted to committing improper acts” to meet those targets, including artificially boosting revenue through channel stuffing and recognizing revenue on sales of incomplete or unshipped products. MagnaChip also allegedly delayed booking obsolete or aged inventory to manipulate its reported gross margin.

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Former CFO Margaret Sakai allegedly directed or approved several of the fraudulent practices, which resulted in MagnaChip misstating its financial results in its regulatory filings related to fiscal years 2011 and 2012 and fiscal quarters in 2013.

To settle the SEC’s charges, MagnaChip agreed to pay a $3 million penalty and Sakai agreed to pay a $135,000 penalty. “MagnaChip engaged in a panoply of accounting tricks to artificially meet its financial targets,” Jina L. Choi, director of the SEC’s San Francisco Regional Office, said in a news release.

Over the relevant period, the SEC said, MagnaChip’s stock price increased by 69% and the company benefited from issuing debt at more favorable rates than were historically available to it.

In one improper transaction cited by the SEC, MagnaChip accelerated $1.8 million of revenue into 2011 by altering a purchase order from a customer to conceal language stating that the customer did not accept title or risk of loss on the goods until Jan. 1, 2012.

Sakai allegedly told the Korea-based sales employee who had overseen the deal negotiations that the revenue could not be recognized if the purchase order contained that language. “The sales employee then whited-out the relevant language in the purchase order and provided it to the finance department,” the SEC said.

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