The SEC charged PowerSecure International, Inc. with matters related to inadequate segment reporting in a settled enforcement action. PowerSecure did not admit or deny the SEC’s findings.
According to the SEC, PowerSecure’s Form 10-K for the year ended December 31, 2015, outlined errors in prior period disclosures and revised its segment reporting disclosure to reflect information for the years ended 2012 to 2014 on a basis consistent with its 2015 reportable segments. In its 2015 filing, PowerSecure also concluded that its disclosure controls and procedures for that three year period were not effective due to a material weakness in its internal control over financial reporting that it identified in 2015 related to its misapplication of GAAP related to segment reporting.
During the 2012 Form 10-K review process, the Commission’s Division of Corporation Finance (“Corporation Finance”) questioned PowerSecure’s segment reporting disclosures. In response to Corporation Finance’s comments, PowerSecure maintained it had been correct in reporting only one segment in 2012.
Whether a particular component of a public entity is an operating segment turns on the manner in which management makes operating decisions and assesses performance. ASC 280-10-05-3 refers to this as the “management approach” and ASC 280-10-50-1 defines an operating segment as a component of a public entity that has all of the following characteristics:
- It engages in business activities from which it may earn revenues and incur expenses.
- Its operating results are regularly reviewed by the Chief Operating Decision Maker (“CODM”) to make decisions about resources to be allocated to the segment and assess its performance.
- Its discrete financial information is available.
As explained in ASC 280, the term CODM refers not to a specific title within the organization but rather to the function of allocating resources to and assessing performance of the segments of a public entity.
According to the SEC, PowerSecure misapplied ASC 280 in claiming the discrete financial information criterion was not met since certain operating expenses were not allocated amongst its business units with precision below gross profit. However, the SEC stated to meet this criterion, a business component need only have a measure of profit or loss available and gross profit is sufficient for this purpose. Additionally, ASC 280 contains no provisions regarding the level of precision at which costs are allocated within a company.
The SEC noted PowerSecure also misapplied ASC 280 by concluding that its CODM – who was determined to be the Chief Executive Officer (“CEO”) – did not regularly review operating results below the consolidated level to make decisions about resource allocations and to assess performance. The SEC said this was inconsistent with the way in which the CEO regularly received, reviewed, and reported on the results of the business and how the company was structured. On a monthly basis, the CEO received financial results that reflected a measure of profitability on a more disaggregated level than the consolidated entity. Further, on a quarterly basis, the CEO met with each business unit leader to discuss operational issues, sales forecasts, and financial performance. In 2012 and 2013, some of the business unit leaders had business unit level budgets and forecasts and received incentive compensation based, at least in part, upon the results of their business unit. Moreover, each quarter, the board of directors received discrete financial information below the consolidated level, which was presented by the Chief Financial Officer, along with commentary provided by the CEO.