Accounting & Tax

EDS Settles Charges of Inadequate Disclosure

Among other charges, the SEC says the consulting giant failed to properly disclose the cost of derivative contracts used to help manage its stock o...
Stephen TaubSeptember 25, 2007

EDS agreed to pay $491,000 to settle a number of accounting and securities law violations, according to the Securities and Exchange Commission.

In addition, the former president of its Indian subsidiary agreed to pay a $70,000 penalty to settle bribery charges.

The SEC’s order found that EDS failed to disclose the cost of certain derivatives contracts for the first and second quarters of 2002, and then selectively disclosed the cost and early settlement in the third quarter of 2002.

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The SEC added that as part of EDS’s plan to manage its employee stock option program, the computer outsourcing giant entered into derivatives contracts to purchase its own shares. Though EDS made some limited disclosures regarding the contracts in its second quarter report, the disclosures were “ambiguous and incomplete,” it added.

The SEC also asserted that EDS failed to adequately disclose in its 2002 second quarter report what it called “an extraordinary transaction” that comprised over 25 percent of EDS’s operating cash flow in the first half of that year.

In addition, the regulator accused EDS of maintaining inaccurate books and records by employing certain inaccurate assumptions in accounting models used to estimate revenues and expenses for the company’s multi-billion dollar Navy/Marine Corps Intranet (NMCI) contract.

In its complaint against Chandramowli Srinivasan, the former president of A.T. Kearney India (ATKI), which was an EDS subsidiary at the time, the SEC alleged that between early 2001 and September 2003, ATKI made at least $720,000 in illicit payments to senior employees of Indian state-owned enterprises to retain its business with those enterprises.

The SEC asserted that ATKI made these payments at Srinivasan’s direction after the senior employees threatened to cancel the contracts with ATKI. The payments allegedly allowed ATKI to maintain the contracts, from which it earned about $358,880.

EDS, which did not admit or deny the accounting-related charges, was ordered to pay $358,800 in disgorgement and $132,102 in prejudgment interest.

Srinivasan, who also did not admit or deny the charges against him, agreed to pay a $70,000 penalty.

“We are pleased that the investigation is resolved and that we can put these historical matters behind us,” said EDS spokesman Bob Brand, according to the Associated Press.