Oracle fined $2 mn for parking India sales funds *outside* the companies books

Oracle has been fined $2mn by Securities and Exchange Commission owing to accounting discrepancy with respect to sales from its India office. Between 2005 and 2007, Indian government customers paid Oracle India’s distributors at least $6.7 million on these sales, with Oracle receiving approximately $4.5 million in revenue, resulting in about $2.2 million in funds improperly “parked” with the Company’s distributors.

From SEC litigation:Oracle_logo

From 2005  to  2007, certain employees of Oracle’s Indian subsidiary secretly “parked” a portion of the proceeds from  certain sales to the  Indian government and put the money to unauthorized use, creating the potential  for bribery or embezzlement.  These Oracle India employees structured more than a dozen transactions so that a total  of around $2.2 million was held by the Company’s distributors and  kept off Oracle India ‘s corporate books.  The Oracle India employees would then direct its distributor to disburse payments out of the unauthorized side funds to purported local “vendors.” Several of the “vendors” were merely storefronts that did not provide any services.

On approximately 14 occasions related to 8 different government contracts between 2005 and 2007, certain Oracle India employees created extra margins between the end user and distributor price and directed the distributors to hold the extra margin in side funds.  Oracle India’s employees made these margins large enough to ensure a side fund existed to pay third parties.  At the direction of the Oracle India employees, the distributor then made payments out of the side funds to third parties, for marketing and development expenses.  Some of the recipients of these payments were not on Oracle’s approved local vendor list; indeed, some of the third parties did not exist and were merely storefronts.

Because the Oracle India employees concealed the existence of the side fund, Oracle did not properly account for these side funds.  These funds constituted prepaid marketing expenses incurred by Oracle India and should have been recorded as an asset and rolled up to Oracle’s corporate books and records.  These marketing expenses should then have been reflected in the income statement once they were used.  Instead, the parked funds were not reflected on Oracle India’s books and were not properly recorded as prepaid marketing expenses.  This incorrect accounting in turn affected Oracle’s books and records.

The BIG deal with Indian Government

In May 2006, Oracle India secured a $3.9 million deal with India’s Ministry of Information Technology and Communications.  Oracle’s distributor accepted payment from the end user for the full $3.9 million.  Under the direction of Oracle India’s then Sales Director, the distributor sent approximately $2.1  million to Oracle, which Oracle booked as revenue on the transaction. Oracle India employees then directed the distributor to keep approximately $151,000 as payment for the distributor’s services.  The Oracle India employees further instructed the distributor to “park” the remaining approximately $1.7 million to be used for disbursement towards “marketing development purposes.”  Several Oracle India employees were aware of the parked funds arrangement, which violated Oracle’s internal corporate policies.

Two months later, an Oracle India employee provided Oracle India’s distributor with eight invoices for payments to third party vendors, in amounts ranging from approximately $110,000 to $396,000.  These invoices were later found to be fake.  None of these third parties, which were just storefronts and provided no services on the deal, were on Oracle’s approved vendor list.  As directed by the Oracle India employees, the distributor sent out the third party payments, which created the potential that they could be used for bribery or embezzlement.

SEC’s concern was mainly about Oracle failing to seek transparency in or audit third party payments made by distributors on Oracle India’s behalf and NOT on company’s corporate policies.