Jina Choi is partner and Andre Fontana is an associate at Morrison & Foerster LLP. This post is based on their Morrison & Foerster memorandum.
On August 24, 2021, the SEC announced a settled enforcement action against Pennsylvania-based Healthcare Services Group, Inc. (HCSG) and its former CFO for accounting and disclosure violations that resulted in the company reporting inflated earnings per share (EPS) that met research analysts’ consensus estimates for multiple quarters. The SEC also charged HCSG with failing to keep accurate books and records and sufficient internal accounting controls, and charged its former controller with causing those violations.
Following two cases from last year, the action against HCSG is the third enforcement action—and likely not the last—resulting from the SEC’s EPS Initiative, which was created to use data analytics to uncover potential accounting and disclosure violations caused by earnings management practices. In the three cases brought under the EPS Initiative, each issuer had patterns of meeting or slightly exceeding consensus EPS estimates for consecutive quarters, followed by significant drops in EPS. The consequences have not been mild: the three companies caught in the crosshairs of the EPS Initiative paid a total of over $12 million in penalties and charges were brought against individual officers who agreed to pay significant fines as well as to be denied the privilege of appearing or practicing before the Commission as an accountant, with permission to reapply after one to three years.
