Regulation

Ex-Accountant Settles Charges of Faking Earnings

The SEC alleged that an official of a subsidiary engaged in a scheme to inflate the unit's financials, then provided false information to the paren...
Stephen TaubJuly 17, 2007

A ex-accountant at an Irish unit of a former U.S. public company settled charges with the Securities and Exchange Commission that he and two other officials of the subsidiary cooked the books to hide the declining performance of Zomax Ireland.

Under the terms of the settlement Paul Kearney, a former financial accountant of Zomax Ltd., the Irish subsidiary of Zomax, Inc., a former U.S. public company, agreed to an SEC cease-and-desist order without admitting or denying any of its findings.

Last month, the Securities and Exchange Commission charged a former financial controller and a formal general manager of Zomax Ireland with making false journal entries to overstate the sales accrual account, capitalizing spare machine parts that should have been expensed, and understating accruals for employee holiday pay.

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Headquartered in Plymouth, Minn. and founded in 1996, Zomax, Inc. manufactured CDs and DVDs and provided software and related services to computer makers. Its subsidiary, Zomax Ireland, was an Irish limited liability company that served as a customer contact center and printing and packaging manager. In October 2006, the parent company was acquired by a private-equity fund and later merged with another subsidiary fund.

The SEC charged that from the end of 2003 through 2004, Kearney, along with two senior officers of Zomax Ireland who were not named in the commission’s report on the settlement, engaged in a scheme to inflate the financial results of Zomax Ltd. They then allegedly provided false financial information to the parent company.

The regulator asserted that the scheme at the subsidiary, in turn, caused Zomax Inc. to materially misstate its consolidated financials for the first three quarters of 2004 and to file inaccurate quarterly reports with the commission.

As a result, on March 31, 2005, Zomax filed its 2004 annual report, which restated its financials for the first three quarters of 2004. The restatement, caused mainly by the fraudulent accounting, drove down Zomax’s previously reported quarterly results for 2004, according to the SEC.

The restatement boosted Zomax Inc.’s net loss by 58 percent for the first quarter of 2004, decreased net income by 57 percent for the second quarter, and increased the company’s net loss by 10 percent in the third quarter, according to the SEC.