Parallel charges filed by the SEC and DOJ in July 2019 alleged that the former
CEO and two former sales executives of Power Solutions International, Inc.
(“PSI”), a publicly traded engine manufacturer, fraudulently inflated PSI’s revenue
by recording sales of products that were not complete, that the customer had not
agreed to accept, and for which the price was falsely inflated. The SEC also alleged
that PSI recorded sales from improper “bill and hold” arrangements and that the
executives misled and concealed information from PSI’s internal accountants
and external auditors in an effort to meet the company’s revenue targets. The
executives are no longer employed by PSI, which is said to be cooperating with the
investigation. In May 2019, PSI restated its financial statements for fiscal years 2014
and 2015, which reflected a reduction in revenue of approximately $25 million. To
date, the government has not brought charges against PSI in connection with the
- Emphasis on Meeting Revenue Targets – According to the SEC’s complaint,
demand for PSI’s products was tied to the price of oil because many of PSI’s
largest customers purchased engines to be used in the oil and gas industry.
When the price of oil was depressed in 2015, it became increasingly difficult
for PSI to meet its revenue targets, which led the executives to engage in
aggressive accounting practices. The order describes “end-of-quarter drives to
hit revenue targets” in which the executives incentivized customers to place
orders for products that they did not need, and to accept products earlier than
desired. For example, during the first quarter of 2015, PSI recorded revenues of
approximately $7.8 million “for the purported sale of engines to a customer that
was given an indefinite, open-ended right to return the engines if it did not need
- Concealment of Fraudulent Accounting – The SEC’s complaint alleges that
the PSI executives concealed their fraudulent revenue recognition practices from
the company’s internal accounting team and external auditors by not informing
them of key information regarding certain sales transactions, including the
existence of side agreements and right of return arrangements with customers.
In many instances, the management representation letter that the company’s
CEO signed for the external auditor falsely stated that such arrangements had
been shared with the auditor – likely a key factor in the government’s decision to
bring criminal charges. When the revenue recognition practices were reported
to the audit committee and board, PSI commenced an internal investigation in
the summer of 2016. The SEC alleged that the CEO’s misconduct continued
during the internal investigation – both by characterizing the basis for the
investigation as meritless and by making false statements regarding the merits
of the accounting practices to PSI’s chief legal officer, which were ultimately
shared with the company’s auditors.
The SEC’s complaint can be found here.
The DOJ’s indictment can be found here.
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