SEC Charges Healthcare Services Company and CFO for Failing to Accurately Report Loss Contingencies as part of Continuing EPS Initiative

The Securities and Exchange Commission today announced that Pennsylvania-based Healthcare Services Group, Inc. has agreed to pay $6 million to settle charges that the company engaged in accounting and disclosure violations that enabled the company to report inflated quarterly earnings per share (EPS) that met research analysts' consensus estimates for multiple quarters. This is the third action to result from the Division of Enforcement's ongoing EPS Initiative, which uses risk-based data analytics to uncover potential accounting and disclosure violations caused by, among other things, earnings management practices.

The SEC's order finds that in 2014 and 2015, HCSG, a provider of housekeeping, dining, and other services to healthcare facilities, failed to timely accrue for and disclose material loss contingencies related to the settlement of private litigation against the company, as required by U.S. Generally Accepted Accounting Principles. By failing to properly record the loss contingencies in the appropriate quarters, which would have had the effect of reducing the company's income, HCSG reported EPS that met to the penny or came close to meeting research analyst consensus EPS estimates and reported multiple quarters of EPS growth, including then-record-high EPS. According to the order, HCSG's former CFO John C. Shea failed to direct the recording or disclosure of the loss contingencies on a timely basis. The order also finds that HCSG's Controller, Derya D. Warner, made other accounting entries that were not supported by adequate documentation as required by company policies.

"HCSG reported EPS that met analyst estimates for multiple quarters as a result of accounting violations that were uncovered by the Division of Enforcement's ongoing EPS Initiative," said Gurbir Grewal, Director of the SEC's Division of Enforcement. "As today's actions demonstrate, we will continue to leverage our in-house data analytic capabilities to identify improper accounting and disclosure practices that mask volatility in financial performance, and continue to hold public companies and their executives accountable for their violations."

"HCSG repeatedly failed to record loss contingencies related to litigation settlements despite mounting evidence that such liability was probable and reasonably estimable, while misleading investors by reporting inflated net income and consistent EPS growth," said Anita B. Bandy, Associate Director of the SEC's Division of Enforcement. "It is critical for public companies to ensure that accounting judgments, including those involving loss contingencies, are not being used to manage earnings and distort financial statements."

The SEC's order finds that HCSG and Shea violated Sections 17(a)(2) and (3) of the Securities Act of 1933, and that HCSG violated the financial reporting, books and records, and internal controls provisions of the Securities Exchange Act of 1934. The order further finds that Shea caused HCSG's violations, and Warner caused HCSG's books and records and internal controls violations. Without admitting or denying the SEC's findings, HCSG, Shea, and Warner have agreed to cease and desist from future violations of the charged provisions and pay civil penalties of $6 million, $50,000, and $10,000, respectively. Shea also has agreed to be suspended from appearing and practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies. The order permits Shea to apply for reinstatement after two years.

The SEC's investigation was conducted by Mark Oh and Eric Hubbs, with assistance from Melissa Armstrong and David Misler of the Trial Unit, and was supervised by Fuad Rana and Ms. Bandy.