Accounting & Tax

Undisclosed Uncollectibles Force SEC Settlement

Integrated Electrical Services settles SEC charges that it didn't properly reserve for disputed receivables.
Stephen TaubAugust 31, 2007

The Securities and Exchange Commission has settled civil charges against an electrical-contracting company and seven former officers and employees for engaging in a number of disclosure and accounting violations in 2003 and 2004.

The commission alleged that over the course of four consecutive quarters in 2003 and 2004, Integrated Electrical Services Inc. failed to disclose that about $3 million in unsigned change orders from two construction contracts at one of its subsidiaries was being disputed, putting the collection of that amount in doubt, and that IES failed to appropriately reserve for these material loss contingencies in its financial statements.

The seven individuals who allegedly admitted to the violations include former chief executive officer Herbert R. Allen, former chief operating officer Richard L. China, former regional operating officers Ernest P. Breaux and Thomas E. Stalvey, former regional controller James M. Calcote, and former subsidiary president J. Carl Cannon.

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The SEC alleged that Cannon represented to IES’s external auditors that the change orders were fully collectible at a time when he knew they were in dispute. “The impact of the disputed change orders was material to IES’s pre-tax income,” the SEC added.

The complaint noted that IES ultimately wrote off roughly 70 percent of the income previously recorded from the change orders. In addition, the complaint alleged that during three of those quarters, IES lowered its allowance for doubtful accounts by about $1.8 million without proper disclosure to investors.

The SEC also alleged that the seven individuals each knew that the unsigned change orders were in dispute, and aided and abetted IES’s disclosure and accounting violations.

The seven individuals, without admitting or denying the allegations, agreed to settle the SEC’s action by consenting to permanent injunctions against their respective violations.

In a related matter, the SEC filed cease-and-desist proceedings against IES’s former chief accounting officer, David A. Miller, for his role in causing IES’s disclosure lapses in 2003 and 2004.

Without admitting or denying the findings in the commission’s order, Miller agreed to cease and desist from causing violations of certain exchange rules.