Automation & Control Lessons in Latest SEC Enforcement

We have an interesting enforcement action from the Securities and Exchange Commission this week, where the agency dinged a telecom company and its former executives $1.9 million for misleading statements on revenue projections.

The kicker: it looks like the company’s own sales automation software created the audit trail that painted the company into an enforcement corner.

The company is Sonus Networks, a maker of telecommunications equipment based in suburban Boston. In early 2015, the SEC says, then-CFO Mark Greenquist misled investors by affirming guidance that quarterly sales would be in the range of $74 million — even though he knew that estimate was based on deals the company had reclassified as closing in the current quarter, when in reality they weren’t likely to close until sometime later in the year.

Sure enough, those pending deals didn’t close in the quarter. Sonus lowered its guidance from $74 million to around $50 million. The share price promptly fell 33 percent and wiped out $225 million in market cap.

OK, so Sonus was pulling future deals into the current quarter to meet investor expectations; that’s not news. Pulling sales forward is a time-honored way to manipulate revenue numbers.

What caught my eye was this detail on Page 6 of the SEC complaint

Sonus used a third-party tracking tool to track potential sales opportunities. The salesforce was required to populate the tracking tool with then-available information about potential sales opportunities, including the deal’s estimated revenue and closing date.

Uh oh. A tracking tool is useful to business operations in all sorts of ways — but in the realm of regulatory compliance and enforcement, it’s also useful because it creates an audit trail.

Sonus made its sales forecasts based on two factors: the data that sales executives put into that tracking tool, including the likelihood of when a deal will close; and the judgment of regional vice presidents who reviewed that data. In January 2015, as Sonus was telling investors it expected to hit that $74 million target, those internal projections came up $10.2 million short.

Later that month, at Sonus’ annual sales team meeting, the company’s head of sales, Michael Swade, instructed sales subordinates to skip team meetings and figure out how to close that gap. They were specifically told “to reclassify enough deals as Q1 Committed Pipeline to close the $10.2 million gap.”

Records vs. Records

You can guess the rest of the story from here. Damaging emails emerged where subordinates wrote statements such as: “I’ve asked many of you to move deals that are still speculative into Q1 Commit and go get. This was a directive from my management to find a path to the company’s quarterly number.” Other executives were warning senior management that they had pulled forward as many deals as they could, and even then didn’t expect those deals to close on time.

Then came crunch time in late February, when it all fell apart. And the SEC made this note in its complaint—

Changes in the tracking tool were consistent with the employees’ warnings. The week before the February 18 Statement, the salesforce removed approximately $5 million of deals from the Q1 Committed Pipeline, indicating that those deals would no longer close in the quarter.

Changes in the tracking tool were consistent with employees’ warnings. That’s the killer detail here. The company had a robust system to track revenue projections — and then used the dreaded management override to ignore those projections when the numbers said something executives didn’t like.

Except logic has a way of catching up to management override, and employees have a way of warning management when its override decisions are unwise. So we have automated documentation of when and how sales numbers were changing, and email documentation of employees’ unease at the motives behind the changes.

All that led to a no-win situation for Sonus, Swade, and Greenquist. As usual, nobody admitted or denied any wrongdoing, but all three parties consented to the SEC charges. Sonus (which these days does business as Ribbon Communications, a terrible name change that warrants civil investigation itself) agreed to pay $1.9 million in penalties. Greenquist will pay $30,000, Swade $40,000.

The key point here is that by using automation software to its fullest extent (which a company will typically want to do), a company throws off tons of data that can later be used to explore compliance lapses.

Automation Matters

My question here: Was Sonus using for its automation software? The SEC complaint doesn’t say — although any business that size most likely does use Salesforce, because the software is that good.

One of Salesforce’s features is a “field history” function that tracks every change made to a field, with date and time stamp. So a regulator could examine those records, compare them to internal emails and other communications, and construct a pretty damning tale of exactly when management decided to override what the data was saying, to blow smoke up investors’ backsides with a very different story; one that would, ultimately, fall apart.

Of course, other CRM software applications also offer that same field history functionality. The key point here is that by using automation software to its fullest extent (which a company will typically want to do), a company throws off tons of data that can later be used to explore compliance lapses — including management override of sound accounting controls, which never looks good.

Would Sonus have suffered this outcome if it hadn’t used sales automation software, or perhaps kept the field history functions turned off? We’ll never know. But a manual approach to sales work won’t cut it in the modern world.

Then again, overriding what the automated sales systems tell you clearly doesn’t cut it either.

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