The Securities and Exchange Commission charged Aspen Technology Inc. with inflating revenue over a three-year period in an attempt to meet analyst expectations. In addition, the regulator alleged that Aspen’s former senior management was directly involved in negotiating and improperly recognizing the revenue, which was generated through the sale of software licenses.
Specifically, former top executives “improperly recognized revenue on at least 19 different software license transactions involving at least 15 different customers worldwide,” asserted the commission on Tuesday. The scheme involved early recognition of revenue in violation of generally accepted accounting principles (GAAP). Indeed, the revenues collected from software licenses was booked either outside of quarterly periods when attendant contracts were signed or despite the existence of side letters or other contingency arrangements.
As a result, the commission ordered the Cambridge, Massachusetts-based company to retain an independent consultant to review its financial and accounting policies and procedures. Without admitting or denying any of the SEC’s findings, Aspen agreed to the commission’s mandate.
Interestingly, the SEC did not impose a penalty on the company, citing Aspen’s remediation efforts and cooperation. “Aspen promptly self-reported the misconduct, conducted a thorough internal investigation, and shared the findings of that investigation with the staff,” said David P. Bergers, director of the SEC’s Boston regional office.
Although the company has settled with the SEC, Aspen continues to have problems with the way it accounts for money it collects from software licenses. Earlier this month, Aspen said it would restate results for several years after realizing that license sales contracts signed with repeat customers had inadvertently undermined its ability to treat earlier receivables as part of a securitization sale.
In a mistake that highlights just how fine the accounting line is between securitization and a borrowing, the company announced on July 11, that its mistake essentially turned its securitization of license income into debt, and said that financial statements for fiscal 2005 and 2006 and the first three quarters of this year should not be relied upon. There does not appear to be a link between the more recent securitization quagmire and the earlier revenue recognition scheme.
In related matters, the former executives did not fair as well with the SEC as the corporation. In January, the SEC filed a civil injunctive action against David McQuillin, former chief executive officer and president; founder and former chairman Lawrence Evans, and former Chief Financial Officer Lisa Zappala. The SEC accused the trio of engaging in a “fraudulent revenue recognition scheme, causing Aspen to report inflated revenue on at least six software transactions during fiscal years 1999 through 2002.” The regulator said on Tuesday that the case is still pending.
Also in January, McQuillin was criminally charged with one count of securities fraud, which carries a maximum sentence of 20 years in prison upon conviction, and one count of conspiracy to commit securities fraud, which carries a maximum sentence of five years and $250,000. In March, McQuillin pleaded guilty to securities fraud charges.
Prosecutors alleged that McQuillin engaged in the scheme between January 2001 through September 2002, when he and another Aspen executive each held the title of co-chief operating officer and were competing to become the company’s CEO. McQuillin assumed that post in October 2002.
According to prosecutors, McQuillin and others manipulated the company’s revenues in several ways, including by entering into side agreements with a customer making some Aspen revenues subject to cancellation, and therefore not recognizable; backdating sales agreements into earlier financial quarters to give the false impression that Aspen had met the financial expectations of securities analysts; and providing false information to Arthur Andersen, the auditor investigating the company’s revenue-recognition procedures.