Analysis of an SEC Accounting Enforcement Case

• Date: 01 September 2017
• DOI: http://doi.org/10.1002/jcaf.22297
• Published date: 01 September 2017

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© 2017 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22297

Analysis of an SEC Accounting

Enforcement Case

Donald A. Walker Jr

On May 1, 2017, in the Matter

of MagnaChip Semiconductor

Corporation (Corporation) and

Margaret Hye-Ryoung Sakai

CPA (Ms. Sakai) (together the

“Respondents”), the Commis-

sion published an order (Order)

instituting public administra-

tive and cease-and-desist pro-

ceedings. The Order, pursuant

to Section 8A of the Securities

Act of 1933, Sections 4C and

21C of the Securities Exchange

Act of 1934, and Rule 102(e)

of the Commissions Rule of

Practice, made findings and

imposed remedial sanctions

and cease and desist orders

affecting the Corporation and

its former chief financial officer

(CFO) and principal account-

ing officer, Ms. Sakai.1

The monetary penalties

included a $3 million civil pen-

alty against the Corporation

and a $135,000 penalty against

Ms. Sakai. In addition,

Ms. Sakai was denied the privi-

lege of appearing or practicing

before the Commission as an

accountant and barred from

acting as an officer or director

of any issuer having a class of

securities registered with the

Commission pursuant to Sec-

tion 12 of the Exchange Act or

that is required to file reports

with the Commission under

Section 15(d) of the Exchange

Act. The respondents were

ordered to cease and desist

from the conduct covered by

the Order.

What makes this case

interesting to accounting and

finance executives is the scope

of the conduct subject to and

described in the Order.

The Corporation is a semi-

conductor company located

in South Korea, which has

been publicly traded in the

United States since its IPO in

2011. Employees throughout

the company were engaging in

some of the improper account-

ing practices, and some of

those employees were directed

and supervised by the former

CFO. Not long after the IPO,

improper accounting practices

were employed to artificially

increase revenue, delay or

avoid expenses, manage and

smooth gross margins, and

conceal delays in collections.

These practices were designed

to show that the Corporation

was meeting highly aggressive

financial targets set by manage-

ment. Reportedly, high pres-

sures were brought to bear on

company employees to meet

their assigned financial targets.

These practices were assertedly

well known through the Corpo-

ration’s management, and sev-

eral were directed or approved

by the former CFO.

The improper practices

included:

• Entering into undisclosed

side agreements with dis-

tributors, giving them

incentives to take products

before they were wanted

or needed (“channel stuff-

ing”). “Those concessions

included payment terms

extensions, credit limit

increases, unlimited return

and stock rotation rights

on unsold inventory, and

price protection.”2

• Maintaining false records

that indicated that prod-

ucts still in the process

of manufacture had been

completed and shipped.

• Recognizing revenue on

a “sell-in” basis when