Summary and Opinion:  The audit committee investigation disclosed by Symantec last week left out a number of important details that signal to us the management is either misleading investors or has no idea of the scope and nature of an accounting problem serious enough to delay a 10-K filing.  Neither option is good for investors. Ducking analyst questions makes it worse.

The fact the management chose to not provide even basic information about this exposure in their related disclosures is bad on its own.  To us, it also appears the company characterized related SEC contact in a manner that amounts to what we call a stealth disclosure of an SEC probe; that is, the company felt compelled to mention SEC contact, they just don’t want you to recognize they are actually being investigated by the SEC.   We call that a Disclosure Game when it occurs, and we will present why we think that’s what took place here.   

Added to the mix is that our research suggests the SEC was already investigating Symantec as early as 17-Apr-2018 (appeal confirmation pending, but more likely now given company disclosures).

We break it down, with individual sections of the disclosure highlighted and interpreted for you below.

From the Symantec 8-K filed 10-May-2018 –

Audit Committee Investigation:  The Audit Committee of the Board of Directors has commenced an internal investigation in connection with concerns raised by a former employee. The Audit Committee has retained independent counsel and other advisors to assist it in its investigation. The Company has voluntarily contacted the Securities and Exchange Commission to advise it that an internal investigation is underway, and the Audit Committee intends to provide additional information to the SEC as the investigation proceeds. The investigation is in its early stages and the Company cannot predict the duration or outcome of the investigation. The Company’s financial results and guidance may be subject to change based on the outcome of the Audit Committee investigation. It is unlikely that the investigation will be completed in time for the Company to file its annual report on Form 10-K for the fiscal year ended March 30, 2018 in a timely manner.

Our Take:  When you hear the term ‘concerns raised by a former employee’, one of your first thoughts should be to wonder if there is/was a whistleblower. It is important to know who that person was in terms of title, access, and/or knowledge.  A former employee, feeling wronged, could have easily gone to the SEC on the hopes of 1) settling a score, and/or, 2) nabbing one of those big fat rewards for doing so. If true, that also raises the prospect the SEC went to Symantec after being tipped-off, asking for voluntary cooperation as part of an informal inquiry.

Follow-up Questions for Symantec Management:

• What is the nature of the ‘concerns’ raised by this former employee?
   
• When did you first learn of the issues raised by your former employee – and how did you first learn? 
   
• What was the level of responsibility and knowledge of this former employee?

The company can easily answer the above questions without compromising on personal privacy.

From the Symantec 8-K filed 10-May-2018 –

The Audit Committee of the Board of Directors has commenced an internal investigation in connection with concerns raised by a former employee. The Audit Committee has retained independent counsel and other advisors to assist it in its investigation. The Company has voluntarily contacted the Securities and Exchange Commission to advise it that an internal investigation is underway, and the Audit Committee intends to provide additional information to the SEC as the investigation proceeds …

Our Take: This is where it appears to us that Symantec wants you to believe they ‘voluntarily’ contacted the SEC first – all on their own – as a result of these ‘concerns’ raised by a former employee.  While this is indeed possible, we do need to challenge this framing of the matter: First, with data from our own research library and, second, by sharing our understanding of how the SEC investigative process works.

Again, we have a response from the SEC dated 17-Apr-2018, in which the SEC blocked our access to records on Symantec over concern their release could potentially interfere with law enforcement proceedings.  This suggests the SEC was already investigating the company about a month ago. 

Because of this, it’s important to visit upon some ways the expression “voluntarily contacted the SEC” could be interpreted.

One interpretation, and the one we think the company prefers you to make, is that the company went to the SEC first, all on its own, ‘voluntarily’.  Had the company gone to the SEC and self-reported this matter, they could have easily said as much.  It makes a company look good in the face of adversity.  That didn’t happen here.

An alternative interpretation is the SEC contacted Symantec and asked for it to ‘voluntarily’ produce certain information as part of an informal inquiry. That’s how the process involving informal SEC inquiries works and it’s what we think likely happened here.

To say Symantec ‘has voluntarily contacted the’ SEC as stated, is not technically a lie.  It becomes misleading, in our view, when a company does not also inform investors this was done after having received a request for voluntary cooperation with an informal SEC inquiry.

Follow-up Questions for Symantec Management:

• At what point did your internal investigation start? 
   
• When, exactly, was the company’s first contact with the SEC over this matter?
   
• Did you contact the SEC first, or did they contact you?
   
• Has the SEC’s Division of Enforcement informed you it was conducting any sort of inquiry over this matter?  If so, when did they first contact you?
   
• When was your last contact with the SEC over this matter? 
   
• Have subpoenas been received?  (If so, this indicates the investigation has become formal. But be careful as it is false comfort to assume that just because a probe is informal it poses little risk. Both informal and formal SEC investigations can have serious consequences for a company.)
   
• Where does stand with the SEC?  For example, has anyone connected to Symantec been asked to provide testimony related to this matter?

From the Symantec 8-K filed 10-May-2018 –

…  The investigation is in its early stages and the Company cannot predict the duration or outcome of the investigation. The Company’s financial results and guidance may be subject to change based on the outcome of the Audit Committee investigation. It is unlikely that the investigation will be completed in time for the Company to file its annual report on Form 10-K for the fiscal year ended March 30, 2018 in a timely manner.

Our Take:  An internal investigation serious enough to delay a 10-K holds potential for grave consequences for investors over the near-term. Restatements and significant internal changes often result from such probes.

Follow-up Questions for Symantec Management:

• When was the Audit Committee and the auditor notified?
   
• When was outside counsel first retained on this matter?
   
• What information informed the decision to delay the 10-K? 
   
• Why is management effectively hiding out, and refusing to answer even basic questions about this exposure?

The cautionary note for investors is clear:  Instead of being straight with investors about the SEC aspect of its accounting issues, we assert Symantec management instead chose to keep critical information from you.

Whenever you see that you need to ask, what else are they holding back?  The existence of an undisclosed SEC investigation with a start date unknown is a good place to begin.

     -- Probes Reporter®

Independent Investment Research Focused on Public Company Interactions with the SEC.

Notes:  Disclosure Insight® reports provide commentary and analysis on public company interactions with investors and with the SEC. They are heavily reliant on our expertise in using the Freedom of Information Act.    “Disclosure Games®” is a term we use to highlight those public companies engaging in disclosure practices that in our opinion may be misleading, confusing, evasive, or otherwise lacking the transparency needed for investors to make well-informed investment decisions regarding a potentially material exposure. 

To learn more on our process and what our findings mean, click here.