The SEC announced fraud charges and submitted a civil complaint in US District Court in Massachusetts against Nicholas Bowerman, a former finance director of CIRCOR International Inc., a formerly publicly traded technology manufacturer.

The regulator alleges that Bowerman’s fraud led to the company making misleading statements to the public about the company’s financial performance from 2019 through 2021. The complaint seeks a permanent injunction against Bowerman, prohibiting him from acting in an accounting or financial reporting role at a public company, plus disgorgement and civil remedies as deemed appropriate by the court.

The SEC also announced related settled internal accounting charges against CIRCOR.

The case highlights the importance of accurate and transparent financial reporting, and it comes on the heels of a similar accounting enforcement deal with Portland General Electric Company.

Misconduct – and concealment

Bowerman worked at CIRCOR’s UK-based business unit, Pipeline Engineering, and according to the SEC, between 2019 and 2021, he manipulated CIRCOR’s internal accounting records by falsifying Pipeline Engineering’s financial results before they were included in CIRCOR’s consolidated financial statements.

The complaint alleges that Bowerman concealed his misconduct by manipulating account reconciliations, falsifying certifications, fabricating bank confirmation documents, and misleading CIRCOR’s management and independent auditors.

A separate order from the SEC against CIRCOR finds that the company failed to devise and maintain sufficient internal accounting controls concerning financial statement preparation, reconciliation processes, and access to bank accounts.

The SEC claims that these efforts concealed the true financial position of the business unit and resulted in CIRCOR’s public financial disclosures overstating its performance by millions of dollars for fiscal years 2019 and 2020, as well as for the nine-month period ending on October 3, 2021.

Financial overstatement

The numbers are not small. The SEC contends that Bowerman’s misconduct caused CIRCOR to:

• overstate 2019 operating income by $7.2m, or 24%;
• understate 2020 operating loss by $34.5m, or 36%; and
• understate the nine-month period ended October 3, 2021, operating loss by $12.5m, or 120%.

The SEC’s charges against Bowerman included alleged violations of SEC Rules 10b-5(a) and (c), which are aimed at those who engage in acts, practices, or courses of business which operated or would operate as a fraud or deceit upon other persons. The agency also charged him with violating SEC Rule 13b2-1, which prohibits officers or directors of an issuer, or persons acting under their direction, from subverting an auditor’s responsibilities to investors to conduct a diligent audit of a public company’s records.

CIRCOR’s internal control issues

The SEC said in its order against the employer that, like many other CIRCOR business units, its pipeline unit maintained its own set of books and records in a local accounting system.

On a monthly basis, this unit’s financial statements were exported from the local accounting system and transmitted to CIRCOR’s corporate consolidation system for inclusion in the company’s consolidated financial statements. As part of this process, CIRCOR’s control environment required the Finance Director (Bowerman) to perform a monthly reconciliation between the two systems to ensure that the business unit’s financial results were accurately consolidated.

The SEC did not seek a civil penalty because CIRCOR self-reported its financial reporting violations shortly after its internal investigation and provided substantial cooperation to the SEC staff.

CIRCOR’s control environment failed to ensure adequate segregation of duties concerning critical financial statement preparation and reconciliation processes, the SEC said. The Finance Director was the only employee with access to both the unit’s local accounting system and the company’s consolidation system and the responsibility for transmitting the business unit’s financial statements and reconciling the updated information in both systems.

With exclusive access to and responsibility for transmitting data through these systems, the Finance Director, in an effort to improve the pipeline unit’s financial results, repeatedly made unsupported and unauthorized accounting adjustments to the local accounting system before transmitting the financial statements to the consolidation system without anyone knowing that the Finance Director manipulated the local accounting system’s results.

The Finance Director then falsified the periodic reconciliations to make it appear that the financial statements in both systems were consistent, the SEC alleged.

Inadequate monitoring

The SEC said that CIRCOR also failed to adequately devise and maintain controls over the preparation, review, and approval of cash account reconciliations. For example, the company did not obtain direct access to certain business unit bank accounts, including those at the pipeline unit.

As a result, CIRCOR’s corporate treasury group was unable to independently verify cash balances and activity at the pipeline unit and relied solely on the Finance Director’s representations that the activity was accurately reflected in the books and records.

Cooperation, remediation and no penalty

According to the SEC’s order, the agency did not seek a civil penalty against CIRCOR because the company self-reported its financial reporting violations to the SEC shortly after its internal investigation and thereafter provided substantial cooperation to the SEC’s staff, including providing detailed examples of Bowerman’s unsupported and unauthorized adjustments, summarizing interviews of witnesses located outside the US, and making CIRCOR employees and external forensic accountants available for interviews.

CIRCOR also promptly implemented substantive remedial measures, including:

• retaining outside counsel and forensic accountants to investigate the accounting irregularities at the pipeline unit;
• terminating the Finance Director;
• strengthening its internal accounting controls surrounding smaller reporting locations, changes in financial statement line items, account reconciliations, and quarterly close processes;
• obtaining corporate access to all CIRCOR bank accounts;
• hiring finance and accounting personnel with expertise in financial reporting and U.S. GAAP;
• requiring training for all finance, accounting, and IT personnel related to internal controls over financial reporting and accounting principles; and
• cancelling the bonus compensation scheduled to be paid to a former executive officer of CIRCOR for 2021.

GRIP comment

The SEC’s charges against Bowerman reflect the seriousness of his alleged misconduct, which undermined the integrity of CIRCOR’s financial disclosures and harmed investors for years – investors who relied on the company’s public filings to make financial decisions.

Sadly, the company’s internal controls and compliance program did not operate in such a way to include the needed reviews and ongoing surveillance needed to prevent financial misconduct in a multi-unit business. One person wielded way too much leverage over the books and records here, and significant improvements to the company’s oversight in these areas, plus the new employees and new training the company has already invested in, should prove helpful to the business in future.

With that said, the level of remediation to its compliance program CIRCOR engaged in here was incredibly impressive, and as instructive to compliance professionals as its prior failures. The company completely avoided a penalty – despite its serious internal control lapses – because of the extra effort and seriousness with which it took its remedial endeavors.

Finally, looking at trends, the SEC has pounced on plenty of financial misstatement cases, including one announced just last week against Portland General Electric Company, a publicly-traded regulated utility company in Oregon. The SEC said Portland General had deficient internal accounting controls and books and records prior to booking $127m in derivatives trading losses in August 2020 and deficient disclosure controls relating to its market-risk reporting.