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Self-Reporting to and Cooperation with Enforcement Do Make a Difference

By Professionals Group posted 20 days ago


By George Wilson

On September 25, 2023, the SEC 
announced a settled enforcement action against GTT Communications, Inc.  GTT grew rapidly, primarily through acquisitions.  This growth created challenges and disruption that eventually resulted in material problems in two of GTT’s key operational and reporting systems.  The two systems were used to track elements of expenses, and over time they began reporting diverging amounts.  Though the company tried, the systems could not be reconciled.  As a result, the company could not reasonably determine amounts to record for certain expenses, including its cost of revenue (COR).  Without solving this identified problem, company personnel made large, unsupported adjustments to its accounting records.  When this situation came to light, the company commenced an internal investigation and ultimately filed this Item 4.02 Form 8-K to inform investors that its previously issued financial statements should not be relied upon.

It is difficult to appreciate the magnitude of GTT’s reporting problems.  The company spent more than a year and tens of millions of dollars trying to build the information required to restate its financial statements.  Ultimately, the company abandoned these efforts.  It eventually filed for bankruptcy, emerging as a privately-owned company.  Because the company’s historical records could not be reconstructed, upon emerging from bankruptcy, the company used fresh-start accounting. 

Early in its process the company self-reported its problems to the SEC.  It also “cooperated extensively with the SEC staff during its investigation.”  The company’s remedial measures included “attempting to rebuild its COR accounts, replacing certain members of management, its board of directors, and its auditor, and overhauling its accounting function, including its policies and procedures relating to COR.”

The company entered into a cease-and-desist order, but as a result of self-reporting, cooperating and taking strong remedial steps, there was no monetary penalty against the company.  You can read more in this Press Release and the related SEC Order.

This case presents a favorable outcome, but self-reporting and cooperation present several complex questions.  When companies find a problem, they must consider whether to self-report, when to self-report, how to approach the staff, and what information to share.  For an in-depth discussion of these and a number of related issues, you can listen to this episode of PLI’s inSecurities podcast.  Host Kurt Wolf and Miller & Chevalier Partner Sandra Hanna discuss a variety of issues including considerations for self-reporting.

As always, your thoughts and comments are welcome.