American Renal Associates and three of its former finance executives have been charged with engaging in a multimillion-dollar revenue recognition fraud to boost its financial performance.
The U.S. Securities and Exchange Commission filed a civil complaint on Monday against ARA, a provider of dialysis services; former CFO Jonathan Wilcox; his successor, Jason Boucher; and Karen Smith, a former controller.
According to the complaint, the three executives improperly recognized “topside” adjustments in revenue from 2017 through at least November 2018 in order to hit targets for two key financial metrics — days sales outstanding (DSO), which measures how quickly ARA was collecting payment for its treatments, and revenue per treatment (RPT).
In September 2019, ARA restated its financials, showing it had overstated its net income by more than 30% for 2017 and more than 200% for the first three quarters of 2018.
ARA agreed to pay $2 million to settle the charges. The SEC is seeking civil penalties against Wilcox, Boucher, and Smith.
“ARA and its senior executives allegedly engaged in an extensive revenue manipulation scheme for nearly two years,” Jennifer Leete, associate director of the SEC’s Division of Enforcement, said in a news release.
While Wilcox served as CFO from 2011 through September 2018, Boucher was his chief accounting officer and Smith was his controller. After he stepped down, Boucher, who was promoted to CFO, and Smith, who became vice president of finance, allegedly continued with the “topside” revenue scheme.
According to the SEC, the scheme involved the accounting for reimbursement payments from some commercial insurers when the actual payment did not match the initial estimate.
Accounting standards called for ARA to make a revenue adjustment to true up the initial estimate to the amount actually collected. Those adjustments should have been based on patient-level data but Wilcox allegedly used “a top-down approach to book the revenue he wanted ARA to have,” recognizing millions of dollars in topside adjustments to meet predetermined DSO and RPT targets.
The three executives “each personally benefitted from the scheme by, among other things, receiving bonuses that were inflated by ARA’s misstated metrics, the SEC said.