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The U.S. Securities and Exchange Commission has sent notices of possible civil action to some of Diebold Inc.'s current and former employees, prompting one of the recipients, Kevin Krakora, to step down as chief financial officer, the ATM maker announced last week.
The SEC sent the so-called Wells notices to executives who handled Diebold's finances during a period of several years for which the company already has restated its earnings. The agency sends Wells notices after an investigation but before it takes an action against an individual or company, giving recipients a chance to respond.
In 2007, Diebold said it would change the way it recognizes revenue in response to an SEC investigation into its use of bill-and-hold accounting. Under this accounting method, the company recognized revenue before shipping its products to customers.
Krakora, who remains with Diebold in a nonfinancial reporting role, became the North Canton, Ohio-based company's CFO in August 2005 after Gregory T. Geswein resigned to take the same post at Reynolds and Reynolds Co., which provides technology to automotive dealerships. Geswein also received a Wells notice.
Diebold itself has not received a Wells notice, but spokesperson Michael Jacobsen says it has approached the SEC to discuss its options in case it does.
"We're continuing to cooperate with the SEC in connection with the previously disclosed investigation," Jacobsen says. "As part of the process, we've had preliminary discussions with the SEC concerning resolution of the matter, including possibly entering into a settlement agreement. But it's still possible that the SEC will issue a Wells notice to the company."
Besides Krakora and Geswein, the SEC has sent notices to other employees who "had responsibility in the finance organization at the time, during the period in which those financials had to be restated," Jacobsen says, declining to name the other individuals. Krakora and Diebold executives were not available for interviews.
Diebold named Leslie A. Pierce, vice president and corporate controller, interim CFO.
The SEC investigation into Diebold's accounting began in 2006. Diebold had used the practice for more than two decades; 11% of its 2006 revenue was classified as bill and hold.
Diebold announced in October 2007 it was changing its accounting methods and would record revenue when products were delivered. It also began to delay its earnings reporting at that time. Last year it caught up with its filings and restated earnings back to 2003.
Gil B. Luria, an analyst at Wedbush Morgan Securities, says Wells notices are "a fairly serious step" for the SEC to take against a company or individuals.
Because Diebold completed its restatements last year, Luria did not expect any further action from the regulators. "You never know with the SEC," he says. "The SEC never tells you when it's done."
If the SEC only pursues the individuals it has notified, Diebold may not need to do more than it already has done to satisfy the agency, Luria says, noting this is unlikely.
If the SEC plans to pursue action against Diebold, and if Diebold cannot reach a settlement with the SEC it likely would have to pay a penalty, he says. If it reaches a settlement, some sort of hefty payment likely would be required.
"I don't think it would be enough to materially change the value of the company, but it could be a significant sum," Luria says. "It could be millions of dollars, but that wouldn't change the value of the company or its financials.
