Staff at the Securities and Exchange Commission (SEC) plan to recommend that the SEC sue Beazer Homes USA CEO Ian McCarthy to collect past bonuses, incentive compensation, and profits from stock sales he received when the company’s accounting was in non-compliance.

Beazer announced the Wells filing notice on Monday, Nov. 16, saying that McCarthy intends to submit documents in his defense to the SEC staff. Those documents will be included in the staff’s recommendation to the five-member commission which has the power to approve or reject staff’s recommendation to take legal action.

The company had no comment beyond its disclosure filing.

Under Sarbanes-Oxley law,  if a company is required to restate its accounting due to “material noncompliance of the issuer, as a result of misconduct, with any financial reporting requirement under the securities laws, the chief  executive officer and other financial officer of the issuer shall” pay back the company any bonuses, incentives, or stock profits made that year.

Beazer restated its accounting for a number of years after an internal investigation revealed the company had used “cookie jar accounting," which set aside profits made from 2000 to 2005 when the company was out-performing estimates and then pulled them out later when the company’s sales began to slump. Such actions smooth the peaks and valleys of a company's earnings.

The SEC takes a dim view of the process because it doesn’t give investors an accurate picture of how well or poorly the company is performing at a given time.

The company fired its chief accounting officer at the time and set about the considerable task of restating its earnings during those years. In September 2008 Beazer settled the matter with the SEC. Because the builder had cooperated with the investigation and moved swiftly to investigate and remediate the situation, there was no monetary penalty, and the company was not required to admit or deny any wrongdoing under the settlement.

However, while Beazer as a company may be off the hook, the government is still prosecuting the company’s former chief accounting officer.

And, the latest move to penalize McCarthy for the company’s accounting irregularities now, long after it appeared that the issue had been resolved, seems to come from a recent case in where it was determined that the SEC doesn’t need to allege that the executive is guilty to invoke the Sarbanes-Oxley provision.

Teresa Burney is a senior editor for BUILDER and BIG BUILDER magazines.


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