The US Securities and Exchange Commission (SEC) has fined Computer Sciences Corporation (CSC) $190m (£124.5m) over claims the company manipulated financial results to conceal significant problems on a multibillion pound contract with the NHS, and says its finance director on the project will face charges of ignoring basic accounting standards to increase reported profits
The NHS deal to develop a centralised electronic patient record database was abandoned four years ago after cost overruns. The original CSC contract was for £3.1bn, but estimates of final costs are close to £10bn.
In 2011 the NHS sought to renegotiate the contract terms because of delays in developing software. The SEC alleges that CSC’s accounting and disclosure fraud began after the company learned it would lose money on the deal because it was unable to meet certain deadlines.
To avoid the large hit to its earnings that CSC was required to record, SEC maintains that Robert Sutcliffe, CSC’s finance director for the NHS project, allegedly added items to CSC’s accounting models that artificially increased its profits but had ‘no basis in reality’ according to the regulator.
CSC, with the approval of former CEO Michael Laphen, then continued to avoid the financial impact of its delays by basing its models on contract amendments it was proposing to the NHS rather than the actual contract.
In reality, NHS officials repeatedly rejected CSC’s requests that the NHS pay the company higher prices for less work, the SEC said. By basing its models on the proposals still under negotiation, CSC artificially avoided recording significant reductions in its earnings in 2010 and 2011.
The SEC’s investigation found that Laphen, together with CSC’s former CFO Michael Mancuso, repeatedly failed to comply with multiple rules requiring them to disclose these issues to investors, and they also made public statements about the NHS contract that misled investors about CSC’s performance.
In addition, Mancuso concealed from investors a prepayment arrangement that allowed CSC to meet its cash flow targets by effectively borrowing large sums of money from the NHS at a high interest rate. Mancuso merely told investors that CSC was hitting its targets ‘the old fashioned hard way.’
Andrew Ceresney, director of the SEC’s division of enforcement, said: ‘When companies face significant difficulties impacting their businesses, they and their top executives must truthfully disclose this information to investors.
‘CSC repeatedly based its financial results and disclosures on the NHS contract it was negotiating rather than the one it actually had, and misled investors about the true status of the contract. The significant sanctions in this case against the company, CEO, and CFO reflect our focus on ensuring that such misconduct is vigorously pursued and punished.’
Under the terms of the settlement, former CEO Laphen agreed to return to CSC more than $3.7m (£2.4m) in compensation under the clawback provision of the Sarbanes-Oxley Act and pay a $750,000 (£492,000) penalty.
Former CFO Mancuso agreed to return $369,100 (£242,000) in compensation and pay a $175,000 (£115,000) penalty. In addition, CSC must retain an independent consultant to review the company’s ethics and compliance programs.
The SEC has filed complaints in federal court in Manhattan against three former CSC finance executives, including Sutcliffe, who are contesting the charges against them and who have not agreed to settlements.
Edward Parker is alleged to have fraudulently manipulated CSC’s financial results when serving as a financial controller in Australia, overstating operating results by more than 5% in the first quarter of fiscal year 2009 by using ‘cookie jar’ reserves and failing to record expenses as required.
Chris Edwards, a finance manager in CSC’s Nordic region, is alleged to have used a variety of accounting manipulations to fraudulently inflate operating results as finance executives there struggled to achieve budgets set by CSC management in the US. Among the misconduct was improperly accounting for client disputes, overstating assets, and capitalising expenses.
CSC, which did not admit or deny the allegations, said new leadership had been in place since 2012, and that the company had adjusted financial statements. Since 2011, it has also improved its compliance, financial control and disclosure programmes.
In a statement CSC said: ‘We are pleased to settle this longstanding civil investigation that focused largely on accounting issues from 2009 to 2012. Putting this matter behind us is in the best interest of CSC, our stakeholders and our ongoing business transformation.’
