Huron Consulting Group Provides Restatement-Related Q&A
This Q&A is intended to provide additional background information to the Company’s investors, customers, and employees.
The restatement relates to four businesses that the Company acquired between 2005 and 2007 (the “Acquired Businesses”). Pursuant to the purchase agreements for each of these acquisitions, payments were made by the Company to the selling shareholders upon closing of the transaction and also, in some cases, upon the Acquired Businesses achieving specific financial performance targets over a number of years (“earn-outs”). These payments are collectively referred to as “acquisition-related payments.”
It recently came to the attention of the Audit Committee of the Board of Directors that, in connection with one of these acquisitions, the selling shareholders had an agreement among themselves to reallocate a portion of the earn-out payments to an employee of the Company who was not a selling shareholder. Following this discovery, the Audit Committee commenced an inquiry into the relevant facts and circumstances of all of the Company’s prior acquisitions to determine if similar situations existed. The Audit Committee engaged legal and financial advisors to assist it with the inquiry and notified the Company’s independent auditors who had not previously been aware of the Shareholder and Employee Payments described below.
This inquiry resulted in the discovery that the selling shareholders of the Acquired Businesses:
1) Redistributed portions of their acquisition-related payments among themselves in amounts that were not consistent with their ownership percentages (“Shareholder Payments”) at the date of acquisition by Huron. Such payments were dependent, in part, on continuing employment with Huron or on the achievement of personal performance measures; or
2) Redistributed portions of their acquisition-related payments to certain Company employees (“Employee Payments”) who were not selling shareholders of the Acquired Businesses. Such payments were dependent on continuing employment with Huron or on the achievement of personal performance measures.
Under generally accepted accounting principles (“GAAP”), including
guidance promulgated by the
While the correction of these errors significantly reduced the Company’s net income, earnings per share and EBITDA for each of the affected periods, it had no effect on the Company’s total assets, total liabilities, total stockholders’ equity, cash flows from operations, or adjusted EBITDA.
1) How were the acquisition-related payments originally accounted for?
The acquisition-related payments made by the Company to the selling shareholders represent purchase consideration. As such, these payments were correctly recorded as goodwill, in accordance with GAAP. Payments made upon the closing of the acquisition are recorded as goodwill on the date of closing. Earn-out payments are recorded as goodwill when the financial performance targets are met by the Acquired Businesses.
2) Why is a restatement required?
The Shareholder Payments and the Employee Payments are in substance a second and separate transaction from the Company’s acquisition of the Acquired Businesses, which resulted in a separate non-cash accounting entry that was not recorded by the Company.
Under GAAP, the selling shareholders are economic interest holders of Huron due to their ability to earn additional consideration from Huron. As such, when the selling shareholders pay a portion of their closing proceeds or earn-outs to Huron employees who were not selling shareholders or redistribute those proceeds among themselves based on employment or performance-based criteria, under GAAP, these payments are viewed as resulting from service that is assumed to have benefited the Company. Therefore, these payments are deemed to be non-cash compensation expense for the Company, and the selling shareholders are deemed to have made a capital contribution to the Company.
3) Why would amounts ultimately received and retained by selling shareholders (Shareholder Payments) be included?
The amount that is deemed to be non-cash compensation expense is the entire amount of the earn-out that was subject to redistribution based on their employment or performance as Huron employees. For example, if 60% of the earn-out was distributed based on ownership percentage and 40% of the earn-out was distributed by the selling shareholders based on employment or performance, then the entire 40% is deemed to be non-cash compensation expense, even if the amounts ultimately received by the selling shareholders do not differ significantly from their original ownership percentages.
4) Who were the certain Company employees that received the “Employee Payments”?
The Company employees who received the Employee Payments were client-serving and administrative employees of the respective acquired businesses at the date of the acquisition by Huron and similar employees hired by the respective acquired business after the date of such acquisitions. The Employee Payments were not "kickbacks" to Huron management.
5) Why are the required accounting entries non-cash?
The entries are non-cash because the payments were made directly by the selling shareholders from the acquisition proceeds they received from the Company. The Company did not expend additional cash with respect to the compensation charge.
6) What is the required non-cash journal entry?
An example of the restated entry is as follows:
|Debit||Non-cash Compensation Expense||X|
|Credit||Additional Paid-in Capital||X|
7) Can you please provide additional information regarding
Mr. Massaro has served as a director of the Company since
8) Can you please provide additional information regarding
Mr. Roth has been a key member of our senior management for many years,
both as a founder of Huron and as Vice President of our Health and
9) Can you please provide additional information regarding
Mr. Rojas was a founder of the Company and had a significant role in
establishing the Company’s infrastructure in 2002 such as office space,
information technology, and billing systems. Rojas left the Company in
2006 to join a client, U.S. Foodservice, a subsidiary of Royal Ahold.
Rojas played a significant role in supporting U.S. Foodservice through
its financial turnaround in 2004 and 2005 resulting from an
Statements in this Question and Answer that are not historical in
nature, including those concerning