Analysis of an SEC Accounting Enforcement Case

Date01 September 2017
AuthorDonald A. Walker
DOIhttp://doi.org/10.1002/jcaf.22297
Published date01 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

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