Healthcare Services Group was recently fined $6 million by the SEC
for engaging in accounting and disclosure violations that allowed the
company to report inflated earnings. This was done to meet analyst
expectations over multiple quarters. The SEC found that in 2014 and
2015 the company failed to timely accrue and disclose material loss
contingencies in the correct quarters which resulted in increased
income (SEC, 2021). The result of this earnings management was
meeting analyst EPS estimates to the penny. According to Heller,
these misstatements took place for six straight quarters (Heller,
2021).
This type of earnings management seems to me to be a form of
revenue recognition management. While it is not specifically
improper recognition of revenue, it is in the same vein but for
improper recognition of a liability. “Revenue is recognized only when
a specific event has occurred and the amount is measurable” (Mintz,
2020. P. 413). The result of improperly recognizing a liability in this
case produces the same result as improperly recording revenue: an
increase or decrease in earnings. The CEO of Healthcare Services
Group “repeatedly failed to record loss contingencies related to
litigation settlements despite mounting evidence that such liability
was probable and reasonably estimable …” (Heller, 2021). This shows
remarkable similarities to the recording of revenues. Evidence of an
arrangement exists, the price (cost) is fixed or determinable, and
collectability is reasonably assured. It seems clear to me this is a case
of revenue recognition Do you agree?
References:
Heller, M. (2021, August 24). Healthcare Services Group fined over
accounting. CFO. Retrieved from https://www.cfo.com/accounting-
2/2021/08/healthcare-services-group-fined-over-accounting/
Mintz, S. M. (2020). Ethical obligations and decision making in
accounting: Text and cases. McGraw-Hill Education.
Press release. SEC. (2021, August 24). Retrieved from
https://www.sec.gov/news/press-release/2021-162
