SEC Charges Public Company for Misleading Non-GAAP Disclosures

On March 14, 2023, DXC Technology Company (“DXC”) settled with the Securities and Exchange Commission (“SEC”) for $8 million regarding alleged misleading disclosures in DXC’s public filings. The SEC claimed DXC made misleading disclosures related to its non-GAAP financial performance between 2018 and 2020.

The SEC Allegation
From 2018 through the third quarter of 2020, DXC included in its quarterly and annual filings non-GAAP net income and earnings per share metrics that excluded, among other things, certain transactions, separation and integration expenses (“TSI”). TSI costs were described as costs related to the integration of DXC in its current form, following a merger creating the present corporation in April 2017. DXC presented these non-GAAP measures for the stated purpose of providing investors with meaningful supplemental financial information to evaluate its core operating performance, excluding one-time or nonrecurring expenses.

However, the SEC alleged that DXC’s internal controls and procedures failed to ensure that its expense classifications were consistent with its own public description of TSI costs. DXC also neglected to adequately and consistently review costs attributed to TSI. As a result, the SEC charged DXC with negligently misclassifying millions of dollars of expenses as TSI costs, improperly excluding them and resulting in non-GAAP net income and non-GAAP diluted earnings per share that were materially misleading.

DXC failed to implement disclosure controls and procedures related to its non-GAAP measures. DXC did not have a non-GAAP policy, nor did it have any formal guidance that employees could rely upon to determine which costs should be appropriately attributed to TSI as excluded in the company’s publicly disclosed non-GAAP measures. Instead, DXC had an informal process where business units submitted their expenses to the Financial Planning & Analysis department, who made subjective determinations about TSI costs.

Once classified as a TSI cost, the amounts were aggregated into spreadsheets with tens of thousands of line items and forwarded to DXC’s controller’s office for a quarterly review before their inclusion in DXC’s publicly disclosed non-GAAP measures. According to the allegations, DXC’s controller’s office was unable to appropriately review the classifications due to the large number of line items. Further, the controller’s team thought the Financial Planning & Analysis department had a more robust process in place for analyzing TSI costs before sending the spreadsheet to the controller.

DXC also did not require documentation of TSI costs and company discussions about TSI costs were often addressed orally without a record showing how the decisions were made. Any documentation DXC could provide was incomplete or inaccurate. DXC’s controller’s office raised concerns about certain TSI costs and whether the TSI costs complied with the SEC’s non-GAAP requirements, but its concerns went unaddressed.

SEC Settlement
The SEC charged DXC with violations of Section 17(a)(2) and (3) of the Securities Act of 1933, as amended (“Securities Act”) for negligently violating the anti-fraud provisions of the Securities Act and reporting provisions of federal securities laws. DXC consented to a cease-and-desist order, agreed to pay an $8 million penalty, and undertook to develop and implement appropriate non-GAAP policies and disclosure controls and procedures. DXC did not admit to nor deny the findings in the order.

The SEC continues to focus on non-GAAP financial measures. This case highlights the importance for companies to maintain a formal non-GAAP policy and implement adequate disclosure controls and procedures for the use of non-GAAP measures. Not only do companies need to ensure the use and presentation of non-GAAP numbers are correct, companies should ensure the non-GAAP numbers themselves are accurate.

Tags: SEC

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