(The news featured below is a selection from the news covered in Federal Securities Law Reporter, which is distributed to subscribers of Federal Securities Law Reporter.)

Charges Settled in Revenue Recognition Case

The SEC settled enforcement actions against four former executives at SmartForce PLC, the company's former outside auditor, and its former audit engagement partner in connection with the software company's alleged overstatement of revenue by $113.6 million and net income by $127 million over more than three years.

According to the Commission, SmartForce's financial statements failed to comply with Generally Accepted Accounting Principles by, among other things, recognizing revenue improperly from various types of transactions in which the company engaged, including multiple-element arrangements, reciprocal transactions, and reseller agreements. The SEC instituted both administrative and civil actions against the former CFO and two former vice presidents of finance, and filed an injunctive action against the former controller of SmartForce's subsidiary in the United States. The four will pay a total of $2.3 million in disgorgement, interest, and penalties.

David P. Bergers, director of the Commission's Boston regional office, said that "recognizing revenue without sound, rigorous analysis is a recipe for false financial statements." He added that "officers must ensure the financials are accurate, and cannot hand off that fundamental responsibility to their subordinates, the auditors, or anyone else."

The Commission also instituted proceedings against Ernst & Young Chartered Accountants and the lead partner on the SmartForce engagement for engaging in improper professional conduct in connection with multiple audits and periodic reviews of SmartForce's financial statements. Ernst & Young Chartered Accountants were censured and agreed to pay $725,000, an amount equal to its audit fees. The firm, based in Dublin and a member firm of Ernst & Young Global, also agreed to make several enhancements in its audit practices of U.S. public companies in areas such as training and staffing of engagements.

"Global audit quality is crucial for the protection of investors, and a key to audit quality is the need for auditors to obtain sufficient evidence to support their audit opinions," said Walter G. Ricciardi, the Commission's deputy director of enforcement. He concluded that "audit firms anywhere in the world engaged by U.S.-listed companies are required to provide their personnel with sufficient training to fulfill this vital role at the heart of the auditor's mission, and if they fail, sanctions will be imposed."