In a recent announcement, the U.S. Securities and Exchange Commission (SEC) has decided not to impose civil penalties on Cloopen Group Holding Limited, a Chinese cloud communications company. This decision came after Cloopen’s American depositary shares were previously traded on the NYSE. The SEC’s leniency. was attributed to Cloopen’s proactive approach, which included self-reporting the issues.
The case centered around fraudulent activities conducted between May 2021 and February 2022 by two senior managers within Cloopen’s strategic customer contracts and key accounts department. These managers were found to have prematurely recognized revenue on service contracts in an effort to meet aggressive quarterly sales targets. This premature recognition of revenue involved contracts for which Cloopen had not completed, or in some cases, not even commenced work. Consequently, Cloopen reported inflated financial results for the second and third quarters of 2021, alongside exaggerated revenue guidance for the fourth quarter of 2021.
Cloopen‘s commendable response to uncovering these irregularities involved initiating an internal investigation and promptly informing the SEC about the discovered accounting violations. The company went above and beyond in its cooperation with the SEC, offering detailed summaries of witness interviews conducted in China and facilitating the translation of crucial documents that were initially in Chinese.
In terms of remediation, Cloopen took decisive action by terminating or disciplining the implicated employees, restructuring the affected departments, enhancing its accounting controls, and hiring new finance and accounting personnel with proficiency in U.S. generally accepted accounting principles (GAAP).
This case serves as a precedent, illustrating the SEC’s approach to handling companies that actively engage in rectifying violations, thereby reinforcing the value of self-regulation and cooperation in maintaining the integrity of the financial markets.
