The Securities and Exchange Commission’s list of accusations against an ex-CFO and two former controllers at OM Group, a specialty chemical company, reads like a glossary of terms used in accounting fraud.
Among the charges in the just-settled complaint against the three former finance officials were overcapitalizing overhead costs; inflating inventory-recovery yields; booking improper supplier receivables and interest receivables; duplicating entries already made at the operating unit level; recording inaccurate inventory estimates; and reporting expenses out of the period in which they occurred.
The three executives—James Materna, the former finance chief; John Holtzhauser, a former controller of the group; and Paul Venesky, an ex- controller of OMG Americas, a subsidiary—did much of their tinkering as the company was melding the financials of its operations into a consolidated statement and closing its books at the end of reporting periods, according to the SEC.
The three were accused of making many adjustments to the consolidated financials that “were wholly unsupported and often duplicative” of entries already recorded at the operating unit level.
At the end of each quarter and fiscal year, OM Group consolidated its operating entities financials into one consolidated statement, according to the SEC. During the process of closing its books, Holtzhauser and Materna allegedly made more than 700 “top-side adjustments” to the group’s consolidated financials. Support for the adjustments was “either inadequate or did not exist,” according to the SEC.
The SEC noted that Venesky, who was responsible for consolidating OMG Americas’ financials, used inaccurate estimates to record inventory. “More often than not, Venesky’s estimates increased following feedback from Holtzhauser and Materna,” the commission added.
The SEC also asserted that E-mails reflect the intent to adjust numbers to meet earnings targets or to enhance OM Group’s performance. E-mails also allegedly show that there was a concerted effort by Materna, Holtzhauser, and Venesky to conceal material information from auditors.
The scheme caused the company to file “materially false and misleading financial statements” in the company’s 2001 and 2002 annual reports, the quarterlies for the first three quarters of 2002; and the fourth quarter results in its annual report filing for 2002 according to the complaint. Reports for the first three quarters of 2003 featured similar miscues.
In March 2005, OM Group restated its results downward by $64 million.
The commission charged Materna and Holtzhauser with violating the antifraud provisions of federal securities laws and alleged that Venesky aided and abetted such violations.
Without admitting or denying the SEC’s charges, Materna and Holtzhauser each agreed to a $100,000 civil penalty, a five-year bar from serving as an officer or director, and the issuance of an order imposing a five-year suspension. Holtzhauser will disgorge $76,707 of his allegedly ill-gotten gains.
Venesky, who also did not admit or deny the SEC’s charges against him, agreed to pay a $25,000 civil penalty and consented to the issuance of an order imposing a three-year suspension.
Besides its moves against the former officials, the SEC issued a cease-and-desist order that found that OM Group violated antifraud, reporting, books and records, and internal controls provisions of the securities laws. The company will avoid financial penalties reached under a settlement with the commission, according to the Associated Press.