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CFO May Have Done Better with a CPA

The former CFO of SmartForce — now chief legal counsel at a Silicon Valley powerhouse — settles with the SEC. An accounting degree might have serve...
Stephen TaubJuly 20, 2007

The Securities and Exchange Commission has settled charges against a former chief financial officer whose attorney noted that he might have done a better job had he been an accountant. The settlement with former SmartForce CFO David C. Drummond — who is currently Google’s chief legal officer — came amid another announcement that the SEC would not take action against SmartForce’s new parent company, SkillSoft, regarding premerger accounting problems.

“In retrospect, Mr. Drummond acknowledges that he would have been better served in his role at SmartForce had he possessed an accounting background,” Drummond’s attorney Harvey Wolkoff said in a statement, according to Reuters. “However, it was not unusual during this period in time to find many CFOs like David who were not trained as accountants, but instead were hired for their expertise in other important corporate functions.”

Drummond holds a bachelor’s of science in history from Santa Clara University and a Juris Doctor from Stanford Law School. He was a law partner in the corporate transactions group at Silicon Valley mainstay Wilson Sonsini Goodrich and Rosati, and had served as Google’s outside counsel.

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The other individuals who settled with the SEC are former SmartForce vice presidents of finance Patrick E. Murphy and John P. Hayes. In addition, the SEC filed an injunctive action against Patrick T. Chew, the onetime controller of SmartForce’s subsidiary in the United States. (SmartForce is based in Dublin.) The four agreed to pay a total of $2.3 million. The SEC charged that the former executives, the company’s former outside auditor, and its onetime audit engagement partner overstated company revenue more than six years ago.

The SEC instituted proceedings against Ernst & Young Chartered Accountants and the lead partner on the SmartForce engagement, Denis O’Hogan, for improper professional conduct related to multiple audits and periodic reviews of SmartForce’s financial statements. The firm was censured and agreed to pay $725,000, an amount equal to its audit fees. The firm, also based in Dublin and a member firm of Ernst & Young Global, agreed to make several enhancements in its audit practices of U.S. public companies in such areas as training and staffing of engagements.

Separately, SkillSoft announced on Friday that the SEC has informed the company that it will take no action against it in connection with the resolution of the regulator’s investigation into SkillSoft’s restatement of SmartForce financial statements that were issued prior to the September 2002 merger. After the merger, SkillSoft determined that SmartForce had made accounting errors with respect to its historical financial statements, corrected those errors, and cooperated with the SEC throughout the course of its investigation into those errors.

According to the commission, SmartForce overstated revenue by $113.6 million and net income by $127 million during a 3 1/2-year period ending in mid-2002. The SEC noted that the SmartForce financial statements failed to comply with generally accepted accounting principles (GAAP). Specifically, the company improperly recognized revenue from various types of transactions, including multiple-element arrangements, reciprocal transactions, and reseller agreements.

The SEC charged that Drummond failed to determine whether SmartForce was improperly booking revenue on a reseller agreement related to SmartForce products. In addition, the SEC alleged that Drummond failed to communicate information about a reciprocal transaction to the appropriate accounting personnel, and took no steps to determine whether the accounting for that transaction complied with GAAP.

Murphy and Hayes were primarily responsible for the accounting decisions at SmartForce, and for making sure that such accounting complied with GAAP. The SEC alleged that on several occasions, the duo improperly concluded that the company could recognize revenue up front on software sales, including on agreements with resellers of SmartForce’s products and multiple-element arrangements. They also allowed the company to book excess revenue on reciprocal arrangements.

Chew, responsible for standard agreements at SmartForce US, was charged with causing SmartForce to improperly book revenue from two nonbinding reseller agreements and from a transaction for which no product was delivered to the customer.

Drummond agreed to pay $700,000, including a $125,000 civil penalty and $573,979 in total disgorgement and prejudgment interest. Meanwhile, Murphy agreed to pay a total of about $668,000, and Hayes $937,000. Chew must pay $85,885 in disgorgement and prejudgment interest, and a civil penalty of $25,000.

The SEC administrative order bars Murphy and Hayes from practicing before the commission as accountants, with the right to apply for reinstatement after two years. The order also requires that Drummond, Murphy, and Hayes cease and desist from committing or causing any violations or future violations of exchange rules. Drummond, Murphy, and Hayes neither admitted nor denied the findings in the SEC order. Chew consented to entry of the judgment without admitting or denying the allegations of the SEC complaint.

Google’s chief executive Eric Schmidt noted in a statement: “We are pleased that David [Drummond] and the SEC have reached a settlement that brings closure to matters which occurred more than six years ago. David has been an important part of Google’s growth and success and we look forward to his continued contributions.”

The SEC sanctions against O’Hogan include a two-year suspension from practicing before the commission. O’Hogan and Ernst & Young Chartered Accountants settled their actions, neither admitting nor denying the commission’s findings.