Regulation

Zapped over Expense Recognition

Ex-Cablevision managers are hit with civil penalties for using phony invoices to record expenses earlier than they should have.
Stephen TaubJanuary 23, 2009

The Securities and Exchange Commission has settled a civil action against three former managers at Cablevision Systems Corp. in connection with improper expense recognition.

The SEC alleged that Catherine McEnroe, Noreen O’Loughlin, and Martin von Ruden, while serving as officers and managers of significant business units at the cable giant, directed or were aware of improper “prepays” and signed inaccurate payment authorization forms that caused improper prepays.

Without admitting or denying the allegations, McEnroe, O’Loughlin, and von Ruden agreed to pay civil penalties of $30,000, $15,000, and $15,000, respectively. Separately, the SEC instituted settled cease-and-desist proceedings against Cablevision for improper expense recognition. The company was not fined.

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The expense-recognition irregularities occurred from at least 1999 through mid-2003, according to the commission’s complaint. Cablevision managers and employees, most significantly within the company’s Rainbow Media Holdings subsidiary, falsified invoices and other documents in order to accrue expenses earlier than they should have been under generally accepted accounting principles, the SEC charged.

The alleged improprieties allowed Cablevision to overstate expenses in earlier fiscal periods and understate expenses in later periods. As a result, the company had to restate its financial statements from 2000 through the first nine months of 2003.

In addition, the SEC claimed that from at least 2000 through late 2003, Cablevision improperly recognized payments, known as launch and marketing support, from television program vendors for advertising and marketing campaigns to attract viewers.

Cablevision lacked “sufficiently robust” internal controls to prevent the errors, according to the SEC. The company delegated to its individual business units the authority to incur expenses and authorize payments. A centralized accounting department recorded expenses in Cablevision’s books and records and issued checks but had little direct knowledge of certain actions at the business-unit level.

Internal accounting procedures merely called for recognition of expenses and requests for payment of expenses to be reported to the accounting department on a standardized “authorization for payment” form, signed by the appropriate-level business-unit manager, with evidence of the expense, such as an invoice, attached, the SEC further explained. “These controls were not sufficient to prevent the manipulation of expense recognition that occurred,” it added.

As a result, “certain Cablevision employees and managers for years were able to defeat Cablevision’s internal accounting controls using methods that were neither particularly devious nor sophisticated,” the SEC asserted in its complaint.

For example, some employees submitted counterfeit invoices to Cablevision’s accounting department that were of noticeably poor quality, and were different in appearance from legitimate invoices, according to the SEC. It also noted that Cablevision employees asked vendors to submit false, vague, or misdated invoices for services not yet provided.

Also, Cablevision checks were sometimes sent to the business unit from which a counterfeit or false invoice originated, ostensibly for delivery to the vendor by an employee of the business unit, the SEC noted. “This deficient practice permitted the business unit to hold payment until the anticipated services were actually rendered,” the enforcement agency asserted.

Cablevision said in a statement, “We are pleased that this matter has been resolved to the satisfaction of the SEC and Cablevision, and that it is now behind us. We note that this issue was discovered and disclosed by Cablevision to the SEC nearly six years ago after an internal review by the company; that the company took prompt remedial action; and that we cooperated fully with the SEC throughout.”

 

 

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