The Importance of Accurate Financial Statements

• Posted on: Sep 19 2022

Financial statements provide important information about a corporation’s financial health.¹ They give insight into the corporation’s operations, cash flow, and overall financial condition.² Investors and shareholders use financial statements to make decisions about whether to purchase the securities of a corporation and, once purchased, the performance of their investment.³

Given the importance of accurate financial statements to the decision-making process of investors and shareholders, the Securities and Exchange Commission (“SEC” or “Commission”) has brought enforcement actions, or settled potential enforcement actions, when corporations and their officers and directors issue materially false or misleading financial statements to the public. The SEC brought and settled such an action against VMware Inc., Palo Alto, California-based technology company, for misleading investors about its order backlog management practices, which, according to the SEC, enabled the company to push revenue into future quarters by delaying product deliveries to customers, thereby concealing the company’s slowing performance relative to its projections.

According to the SEC, beginning in fiscal year 2019, VMware began delaying the delivery of license keys on some sales orders until just after quarter-end so that it could recognize revenue from the corresponding license sales in the following quarter. The SEC said that VMware shifted tens of millions of dollars in revenue into future quarters, building a buffer in those periods and obscuring the company’s financial performance as its business slowed relative to projections in fiscal year 2020. Although VMware publicly disclosed that its backlog was “managed based upon multiple considerations,” noted the SEC, it did not reveal to investors that it used the backlog to manage the timing of the company’s revenue recognition.

“As the SEC’s order finds, by making misleading statements about order management practices, VMware deprived investors of important information about its financial performance,” said Mark Cave, Associate Director in the Division of Enforcement. “Such conduct is incompatible with an issuer’s disclosure obligations under the federal securities laws.”  

The SEC’s order found that VMware violated the antifraud provisions of the Securities Act of 1933, as well as certain reporting provisions of the federal securities laws. Without admitting or denying the SEC’s findings, VMware consented to a cease-and-desist order and agreed to pay an $8 million penalty.

A copy of the SEC’s announcement can be found here. A copy of the SEC’s order can be found here.

Footnotes

1. Maverick, J.B., Why Do Shareholders Need Financial Statements?, Investopedia (May 24, 2022) (here).
2. Id.
3. Id.

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.