Risk & Compliance

Interface, ex-CFO Fined $5M for Inflating Earnings

The SEC says the carpet maker adjusted its accounting when its forecasts indicated it would likely fall far short of analysts' earnings estimates.
Matthew HellerSeptember 28, 2020

Interface Inc. and its former CFO have agreed to pay more than $5 million to settle charges that they artificially inflated the carpet maker’s earnings to meet analysts’ estimates.

The U.S. Securities and Exchange Commission said Monday that Interface’s former Chief Accounting Officer Gregory Bauer directed staff to make unsupported, manual accounting adjustments when Interface’s internal forecasts indicated it would likely fall far short of estimates and that former CFO Patrick Lynch caused him to direct some of the unsupported entries.

The commission also announced similar allegations against Pennsylvania bank Fulton Financial, which agreed to pay a $1.5 million fine.

The two cases are the first to arise from an SEC initiative that uses risk-based data analytics to uncover potential accounting and disclosure violations caused by earnings management practices.

“Public company financial reporting should not present a misleading picture of performance,” Stephanie Avakian, director of the SEC’s Division of Enforcement, said in a news release. “As demonstrated by today’s actions, we will continue to leverage our internal data analysis tools to identify violations, including evidence of earnings management and other accounting or disclosure improprieties.”

According to the SEC, the improper earnings management at Interface involved adjustments to management bonus accruals, expenses related to a key independent consultant, and stock-based compensation.

The adjustments “artificially inflated Interface’s income and EPS, which resulted in Interface meeting or beating consensus estimates for EPS and showing earnings growth,” the SEC said in an administrative order.

In the second quarter of 2015, for example, Interface reported it had tied its all-time earnings record of 33 cents per share when, in fact, it had understated its actual expenses for management bonuses by $1.58 million, inflating its pre-tax income by 5% and its EPS by $0.02.

Lynch left Interface in 2016 and is now CFO of Altium Packaging. He agreed to pay a fine of $70,000 while Interface and Bauer will pay $5 million and $45,000, respectively.

Fulton Financial was accused of improper accounting related to its valuation allowance for mortgage servicing rights that increased its earnings at a time when it otherwise would have fallen short of analysts’ expectations.