SEC vs Panasonic 2018

Fraud Examination
Introduction
The Securities Exchange Commission issued a ruling on its website against Panasonic Corporation. It had investigated the company for violations under Section 21C of the Securities Exchange Act of 1934, and the investigation resulted in a cease-and-desist order. This paper will walk through the case, analyzing the facts and the ruling that was made.

Major Facts of the Case
The case against Panasonic concerns "violations of anti-bribery, anti-fraud, books and records, and internal accounting control provisions of the federal securities law by Panasonic, a global electronics corporation headquartered in Osaka, Japan."
The anti-fraud component of the case is based on an overstatement of pre-tax income by $38.5 million and net income by at least $22.4 million for the quarter ended June 30, 2012. The defendant backdated an agreement with a government airline and provided misleading information about the agreement to its auditor in order to include the revenue in the quarter. The SEC takes this as Panasonic intentionally prematurely recognizing revenue, which is in violation of generally accepted accounting principles.
Section 21C of the SEC Act of 1934 states that if a violation occurs, and it is determined that a penalty will be in the public interest, then a penalty shall be applied to the guilty party. If the act involved fraud, deceit or manipulation, then 21C can be applied. Furthermore, if there is an extent to which the person or entity committing the fraud was unjustly enriched, or if a person or entity was harmed as the result of the action, then a penalty can be assessed.
The timing of revenue flows is one of the more common ways that a company might attempt to commit a fraud. The impact is that the quarter that receives the revenues sees inflated income, both gross and net. In this case, Panasonic's quarterly net income was overstated by approximately 16%. This could reasonably be seen as having a positive impact on the company's stock price, at the very least. Panasonic would still need to find a way to earn more money in subsequent quarters to make up for this timing , but companies often prefer this approach to overstate the current quarter, especially if income would otherwise show as being down, causing a decline in the stock price (K@W, 2004).
There were also issues that the SEC found with Panasonic's internal controls. They spent $1.76 million on consultants that apparently provided few if any legitimate consulting services. This allegation related back to the allegation about corruption, where a government official was paid as a consultant but without doing work this payment was seen by the SEC as a bribe. For the SEC, however, this also raises an issue about internal control, which should have identified a high payment for which no legitimate value was provided.
The payments in question were made through a third-party vendor, and thus were not accurately reflected on Panasonic's financial statements, as they would have looked like payments for goods and services from that vendor, rather than payments to "consultants". Some of the fraud involved sales agents operating in the Middle East, and the facts of the case date back to 2004. There were allegations from the local Panasonic subsidiary in Dubai that the sales agent was using bribes to win business, but Panasonic took no action against the sales agent, and instead continued to shelter the agent from investigation. It was these actions that led to some of the issues with the SEC, and those issues in turn led to further allegations about the lack of internal controls, and the discovery of the mistimed revenue recognition.
The SEC's Reaction
Panasonic shares were trading as ADRs at the time, which meant that the company had to make regular filings with the SEC, and present statements in accordance with generally accepted accounting principles. Starting in 2006, Panasonic was backdating contracts in order to recognize revenue in quarters prior to the point where the revenue should have been recognized, according Panasonic's own rules about revenue recognition, and GAAP. The SEC began an audit and investigation, and uncovered evidence of problems with the timing of revenue recognition pursuant to these contracts, involving the sales agent who was committing the bribery. Thus, the sales agents actions, and the lack of proper oversight on the part of Panasonic, all came to light through this investigation. The SEC rendered its ruling in 2018.
A cease-and-desist against all the violations found in the investigation was rendered. Panasonic was also ordered to pay over $143 million to the SEC, plus a $137 criminal penalty for the bribery, so the case totally $280 million against Panasonic (Lynch, 2018).

My Opinion
My opinion on the case is that the SEC was correct in applying these penalties. Although the transactions did not occur in the United States, Panasonic was trading as an ADR on the NYSE, and the SEC has a mandate to defend US investors against instances of fraud and accounting malpractice. In this case, not only was Panasonic committing bribery, but senior executives at the company were aware of the bribery and sought to cover it up. They failed, as the investigation showed.
The mistiming of revenue recognition is one of the more common types of fraud, but it can have an impact on a company's financial condition, and the trust that investors have in capital markets. If revenue is allowed be recognized whenever a company finds it most convenient, not only does that result in fraud against the relevant taxation agency, but it provides investors with an inaccurate assessment of the company's financial condition.
These charges against Panasonic were quite serious in nature, because not only did they involve criminal activity, but they involved efforts by the company to cover up that activity, and this included a certain lax approach to internal controls. When a company knowingly commits fraud, seeks to cover it up, and fails to have the appropriate controls to defend against this behavior, it indicates that there are many people within the company who want to make the fraud happen. A sanction against the company, in this case with a very heavy fine, puts the financial condition of the company in the negative, something that can tip the balance from a situation where the company is benefitting from a fraud to one where the company is not benefitting at all. That kind of fine is necessary to convince executives to work to ensure that such frauds and their associated cover-ups do not occur in the future. A fine of this size, which is essentially disproportionate to the gain that Panasonic earned from the fraud, also serves to dissuade other companies who may be tempted by the same types of activities.

Conclusions
Panasonic not only committed bribery, but sought to hide this bribery from its internal staff in Dubai, and from investors. Further, associated with the bribery was mistimed revenue recognition, which rendered the financial statements that the company provided to the regulators not just inaccurate, but deliberately so. As a consequence, Panasonic was hit with a heavy fine for its activities. This case not only shows that committing such frauds will have a negative impact on the company, but that the company will also be penalized for having inadequate internal controls to defend against those frauds.

References

Knowledge @ Wharton (2004) Accounting games companies play (especially with revenues and costs). Knowledge @ Wharton. Retrieved July 22, 2018 from http://knowledge.wharton.upenn.edu/article/accounting-games-companies-play-especially-with-revenues-and-costs/

Lynch, S. (2018). Panasonic unit settles US criminal, civil charges of bribery. Reuters. Retrieved July 22, 2018 from https://www.reuters.com/article/us-usa-panasonic-corruption/panasonic-unit-settles-us-criminal-civil-charges-of-bribery-idUSKBN1I11RT

SEC.gov (2018) In the matter of Panasonic Corporation. SEC.gov. Retrieved July 22, 2018 from https://www.sec.gov/litigation/admin/2018/34-83128.pdf

Securities Exchange Act of 1934. Retrieved July 22, 2018 from http://legcounsel.house.gov/Comps/Securities%20Exchange%20Act%20Of%201934.pdf