The BISYS Group, Inc., a leading transfer agent and administrator for the mutual fund industry, settled charges with the SEC that it violated the financial reporting, books and records and internal control provisions of the Securities Exchange Act of 1934. BISYS agreed to settle the case, without admitting or denying the SEC's allegations. BISYS will pay approximately $25 million in disgorgement and prejudgment interest. The charges alleged that from July 2000 through December 2003, former BISYS officers and employees engaged in a variety of improper accounting practices that resulted in an overstatement of the company's reported financial results for the fiscal years ended June 30, 2001, 2002, and 2003 by roughly $180 million. The improper accounting practices were primarily based in the company's Insurance Services division, but also occurred in other divisions of the company.
The SEC complaint alleged that the improper accounting practices were a product of a corporate focus by former management on meeting aggressive, short-term earnings targets and a lax internal control environment. The SEC alleged:
- The Insurance Services division of BISYS responded to the corporate focus on making numbers by engaging in improper accounting practices.
- BISYS failed to adopt and implement adequate controls over the accounting function of the acquired companies as they were integrated. Among other things, BISYS lacked adequate controls for reconciling account balances or tracking receivables and lacked controls adequate to ensure that the assumptions used in estimating revenue and renewal commissions were valid.
- With respect to Insurance Services, BISYS improperly recorded as its own revenue commissions earned by companies acquired by BISYS before they were acquired; failed adequately to reserve against a substantial aging receivable balance; improperly accounted for renewal and bonus commissions; and made other improper accounting entries that overstated revenue or reduced expenses.
- The improper accounting practices within the Insurance Services division resulted in an overstatement of BISYS's reported pre-tax earnings by roughly $118 million for the fiscal years ended June 30, 2001, 2002, and 2003, and by 34.3%, 38.9%, and 20.6%, respectively, in each of those fiscal years. The improper accounting practices in BISYS's other divisions overstated the company's pre-tax earnings by an additional $60.9 million for the same period.
- BISYS filed annual and quarterly reports with the SEC that included financial statements that were inaccurate and misleading. In addition, the company's overstated financial results were incorporated in annual reports to shareholders, press releases, and offering documents including registration statements.
- BISYS violated the financial reporting, books and records, and internal controls provisions of the Exchange Act. The complaint further alleges that BISYS received approximately $20 million in ill-gotten gains as a result of its issuance of convertible debt, stock, and options at prices that were inflated as a result of its violations.