Rollins Inc., a listed pest control company on the New York Stock Exchange (NYSE: ROL), and former CFO, Paul Edward Northen, were charged by the Securities and Exchange Commission (SEC) with improper earnings management. The charges were based on the company’s financial reporting between 2016 and 2018. The SEC alleged that Northen waited the preliminary earnings results were ready, and adjusted the company’s accounting reserve accounts to align with the research analysts’ consensus EPS estimates, without following U.S. Generally Accepted Accounting Principles (US GAAP), and failed to properly document the basis for his adjustments.
Rollins was known for boasting about its EPS record. In late 2020, the SEC’s Enforcement Division detected irregularities in the company’s EPS results through data analytics. On 18 April 2022, the SEC found Rollins to have violated the Securities Exchange Act of 1934. Despite not admitting or denying the SEC’s findings, Rollins and Northen agreed to pay civil penalties of USD8mn and USD100,000, and to stop any future violations of their previous misconduct.
The SEC investigators, Carolyn Winters and Tonya Tullis, uncovered the series of Rollins’ misconduct. What steps could they take to avoid similar situation for at Rollins and other U.S.- listed enterprises going forward?
1. The purpose and benefits of earnings management under accounting regulations.
2. Improper earnings management, and the its difference between from fraud.
3. The impact of regulations and the stock trading environment in the U.S., Shanghai, Shenzhen, and Hong Kong stock exchanges on the motivation of listed companies to engage in improper earnings management.
4. The measures taken by various stock exchanges to regulate and detect improper behavior by listed companies, along with suggestions to improve internal control.