Cloopen Group Holding, a China-based provider of cloud communications services, dodged civil penalties from the Securities and Exchange Commission in an accounting fraud case after taking steps such as cooperating with agency staff and clawing back compensation from its CEO and CFO, the SEC said.
Two senior sales managers at Cloopen orchestrated a fraudulent scheme from May 2021 through February 2022 to prematurely recognize revenue on service contracts, according to a commission order released Tuesday. The misconduct resulted in Cloopen overstating its unaudited financial results for the second and third quarters of 2021 by millions of dollars, the SEC said.
Cloopen reported the accounting violations to the SEC and followed up with prompt remedial measures, including the clawback of more than $200,000 of bonus compensation that had been paid to the company’s CEO and CFO, the Wall Street watchdog said.
Throughout the relevant period, Cloopen didn’t have adequate internal accounting controls and company policies and procedures in place to ensure that revenues from sales transactions were accurately recorded and reported in accordance with U.S. generally accepted accounting principles, the SEC found.
The company was charged with violating antifraud provisions of the Securities Exchange Act of 1934 as well as reporting, recordkeeping, and internal controls provisions of federal securities laws, according to the order.
As part of a settlement with the commission, Cloopen agreed — without admitting to or denying the SEC’s findings — to cease and desist from further violations of the charged securities laws. But the agency said it decided against imposing civil penalties, citing substantial cooperation from the company.
“This enforcement action demonstrates what we have said repeatedly: there are real benefits to companies that self-report their potential securities law violations, assist during our investigations, and undertake remedial measures,” Gurbir Grewal, director of the SEC’s Enforcement Division, said in a press release.
In a company press release, Cloopen CEO Changxun Sun said the settlement “indicates our cooperation and remedial efforts during the process, as well as our continued commitment to improving our internal controls.”
Cloopen provides cloud-based communications products and services to companies of various sizes located primarily in China, according to the order. While the company doesn’t operate in the U.S., it had been required to file periodic reports with the SEC due to American depository shares that formerly traded on the New York Stock Exchange.
Facing pressure to meet strict quarterly sales targets, two senior managers who led Cloopen’s strategic customer contracts and key accounts department directed their employees to improperly recognize revenue on numerous contracts for which Cloopen had either not completed work or, in some instances, had not even started it, according to the commission.
As a result, Cloopen overstated the unaudited financial results that it announced in its filings with the commission for the second and third quarters of 2021 by $1.8 million and $2.8 million, respectively, the SEC said. In addition, the company’s announced revenue guidance for the fourth quarter of 2021 was “significantly overstated,” the agency said.
Within a few days of launching an internal investigation, Cloopen reported the matter to the SEC. This was followed by remedial measures such as firing the two managers who orchestrated the scheme and also disciplining other employees who were involved; strengthening the company’s accounting controls; and recruiting new finance and accounting staff with GAAP expertise.
The company also clawed back $228,000 of bonus compensation paid to its CEO and CFO for the last nine months of 2021.
In 2022, the SEC adopted new rules requiring publicly-listed companies to recover “erroneously” awarded incentive-based pay received by current or former executive officers during the three-year period preceding an accounting restatement due to “material noncompliance.”
Under the rules, clawbacks are calculated based on the error that was subsequently corrected in the accounting restatement and are applied regardless of any misconduct or knowledge of the officer who received the compensation, according to a November blog post published by law firm Nelson Mullins Riley & Scarborough.