The Securities and Exchange Commission announced Friday that it had charged Huron Consulting Group as well as its former finance chief and controller with accounting violations related to overstatements of pretax income from 2005 to 2009. The commission ordered the executives to pay fines and penalties, and Huron settled the case without admitting or denying the SEC’s findings.
The Chicago-based company, formed in 2002 by a group of former Arthur Andersen consultants, was found to have failed to properly record the redistributions of sales proceeds from four acquisitions it made between 2005 and 2008. According to the SEC, the selling shareholders of the four firms it bought used the proceeds from the sales to reward employees who agreed to stay on to work at Huron after the acquisitions. The commission says Huron should have recorded those payments as compensation expenses because the redistributions were (1) contingent on the employees’ continued employment with Huron, (2) based on the achievement of personal performance measures, and (3) not “clearly for a purpose other than compensation.”
Huron acquired 10 consulting firms in that time period, but the misstated compensation expenses were tied to four deals: the purchases of Speltz & Weis, MSGalt, Wellspring Partners, and Callaway Partners.
Huron overstated its pretax income by $56 million during the period of 2005 to the first quarter of 2009, the SEC found. The consultancy’s financial reports overstated income by 4% for 2005, 6.1% for 2006, 30% for 2007, 69% for 2008, and 25% for 2009. Huron restated the financials for those years in August 2009.
The commission says Huron’s then-CFO Gary Burge and its then-controller Wayne Lipski “considered” an SEC staff accounting bulletin that referenced accounting principles related to redistributions in January 2008, but their later analysis of Huron’s redistributions was “inadequate.”
In a statement, Merri Jo Gillete, director of the SEC’s regional office in Chicago, said Huron’s CFO and controller “should have known that their flawed accounting gave investors a misleading impression of the profitability of Huron’s acquisitions.”
In conjunction with the charges, the SEC ordered Burge to pay about $228,000 in disgorgement, interest, and penalties, and ordered Lipski to pay $66,000. Both left the firm in July 2009 along with chief executive Gary Holdren.
Huron agreed to pay a $1 million fine for violating reporting and internal-controls provisions of the Securities and Exchange Act of 1934. The company says it had already established a reserve to cover the SEC penalty in the fourth quarter of 2011.
In a statement about the violations, Huron stressed that while it had to indemnify the former employees for defense costs, it was not obligated to pay the monetary penalties for them.
In August 2009, Huron’s stock fell to $13.69 from $44.35 on news of the restatement, noted the SEC. Its shares traded at $32 on Friday, and have closed above $40 only once since August 2009.