Risk & Compliance

Healthcare Services Group Fined Over Accounting

CFO John Shea allegedly failed to record loss contingencies from legal liabilities, enabling HCSG to report inflated earnings and consistent growth.
Matthew HellerAugust 24, 2021

Healthcare Services Group has agreed to pay $6 million to settle charges that its CFO failed to record loss contingencies from legal liabilities to inflate its earnings.

According to the U.S. Securities and Exchange Commission, the accounting violations resulted in HCSG’s earnings being misstated for six quarters between the first quarter of 2014 and the fourth quarter of 2015.

Had CFO John Shea “properly recorded the financial impact of the loss contingencies at the time they were probable and reasonably estimable, the company would have reported lower EPS and missed research analysts’ consensus EPS estimates in many of the applicable quarters,” the SEC said in an administrative order.

To settle the charges, HCSG and Shea agreed to pay civil penalties of $6 million and $50,000, respectively. Shea also agreed to be suspended from appearing and practicing before the SEC as an accountant, which means he cannot participate in the financial reporting or audits of public companies.

The company announced Tuesday it had appointed Shea chief administrative officer, effective Sept. 1. He had served as CFO since 2012.

“HCSG repeatedly failed to record loss contingencies related to litigation settlements despite mounting evidence that such liability was probable and reasonably estimable, while misleading investors by reporting inflated net income and consistent EPS growth,” Anita Bandy, associate director of the SEC’s Division of Enforcement, said in a news release.

Bensalem, Pa.-based HCSG provides housekeeping, laundry, dining, and food services to the healthcare industry. In 2014 and 2015, it settled several class- and collective-action lawsuits in which employees alleged wage-and-hour violations.

The SEC said Shea first violated accounting standards when he failed to properly record a loss contingency in the first two quarters of 2014 from a settlement of between $2.5 million and $3 million.

Shea determined that no amount for the loss contingency was probable or reasonably estimable in part because the settlement had not received final court approval at the time. But according to the SEC, the contingency was “both probable and reasonably estimable by Q2 2014, or earlier, regardless of whether the court had granted any approval of the settlement.”

Image by Okan Caliskan from Pixabay