DXC Technology Securities Enforcement Case: The Costs That Passed Without Answers

In the DXC Technology securities enforcement case, the company agreed to an $8 million civil penalty to resolve SEC allegations that it inflated non-GAAP earnings by misclassifying expenses as transaction, separation and integration costs. The Securities and Exchange Commission’s account follows the costs through business units, financial planning and the controller’s group, where requests for support went unanswered while earnings releases went out. If you know why an expense entered an adjustment schedule, you may know something the next reviewer never learned.

The agency announced the settlement on March 14, 2023, naming DXC Technology Company as the respondent. This page follows that company’s cost classifications, internal questions and settlement obligations. Our page on misleading non-GAAP measures explains the broader reporting practices behind these adjusted results.

What Did DXC’s TSI Adjustment Cover?

DXC described transaction, separation and integration-related costs as expenses associated with merger integration planning, financing, advisory work, other acquisitions and the separation of its U.S. Public Sector business. The company excluded those costs, called TSI, from non-GAAP net income, non-GAAP diluted earnings per share and other adjusted measures. According to the Securities and Exchange Commission’s settled order, the disputed reporting ran from the end of fiscal 2018 through the third quarter of fiscal 2020.

The merger supplied a recognizable business explanation. DXC, an information technology company headquartered in Ashburn, Virginia, formed in April 2017 when Computer Sciences Corporation merged with most of Hewlett Packard Enterprise’s Enterprise Services business. DXC told investors that its adjusted measures helped them evaluate core operating performance apart from one-time or nonrecurring expenses. Management also understood that financial analysts used its non-GAAP commentary and earnings guidance.

That public explanation gave the cost schedule a standard to meet. The Securities and Exchange Commission alleged that the expenses included in the adjustment extended beyond what DXC’s own description covered. An employee who knew the purpose of a project could therefore recognize the mismatch the agency alleged.

How Did DXC Approve the Costs?

In the Securities and Exchange Commission’s account, business units proposed TSI costs, and financial planning and analysis staff initially approved the classifications. An approved expense came out of the unit’s internal profit-and-loss figures, increasing the profitability reported inside the company. The label changed how the business unit’s performance looked before it reached the investor presentation.

According to the order, financial planning staff did not require a documented basis for each proposal, its connection to a transaction or integration project, or its expected amount and duration. They also failed to document their own approval reasons consistently. As employees changed, previously approved classifications continued without annual reassessment. Costs coded as integration or transaction expenses rolled into the quarter-end total.

According to the order, some financial planning employees expected the controller’s group to decide whether the exclusions belonged in public reporting. The controller’s group, in turn, believed that financial planning had already done a more thorough review than it actually had. The review lived in the other department.

The controller’s group received a spreadsheet containing tens of thousands of line items, with insufficient project descriptions and limited time for review. Questions sometimes produced no documentation, inaccurate or incomplete information, or oral answers without an adequate written record. The order also described non-GAAP policy drafts circulated internally and to the independent auditor that neither the controller’s group nor the disclosure committee adopted.

The Assistant Controller Asked Again

The Securities and Exchange Commission’s order describes repeated challenges from an assistant controller responsible for external reporting. During the second quarter of fiscal 2019, that employee questioned branding, integration efforts, internal labor and tax expenses included as add-backs, and requested a breakdown by project. The requested detail did not arrive. The order says the employee ultimately certified the reporting with comments.

In the following quarter, the assistant controller again questioned the expenses. The order reproduces these words from the employee’s response to an internal certification survey:

According to the order, the company issued the earnings release before that certification and filed its quarterly report the next day, despite an incomplete review. Beginning in the fourth quarter of fiscal 2019, DXC moved the exchanges between financial planning and the controller’s group earlier. The agency said the earlier spreadsheets still lacked enough information to determine whether many costs qualified, and the company still had no policy governing the classifications. The spreadsheet arrived sooner. The missing explanation stayed missing.

Which Expenses Did the SEC Challenge?

The Securities and Exchange Commission’s examples connect the adjustment to the actual reason DXC incurred the expense. A vendor’s statement of work and a landlord’s decision supplied facts that the integration label left out.

Tax-Credit Work With a Different Purpose

The Securities and Exchange Commission alleged that DXC hired a consulting firm to evaluate historical research-and-development tax credits so it could amend earlier tax returns and claim additional credits. Financial planning staff told the controller’s group that the work standardized the merged company’s tax-credit methodology and included the costs as TSI on that basis.

In the agency’s account, the contract described identifying incremental credits and contained no work on policy or methodology standardization. That difference matters to someone who commissioned the work or reviewed the vendor’s scope: the business purpose in the contract did not match the explanation used to exclude the expense from adjusted earnings.

A Data Center the SEC Said Had to Move Anyway

The Securities and Exchange Commission said DXC classified more than $38 million in data-center relocation expenses as integration costs across six consecutive quarters. Operations moved from a legacy Computer Sciences Corporation facility to a nearby legacy Enterprise Services facility. But before the merger, the landlord had told Computer Sciences Corporation that it would redevelop the property and would not renew the lease.

The move and its costs were therefore required regardless of whether the merger happened, according to the order. When the assistant controller asked about the expense, the answer described an already approved integration of two facilities and omitted the earlier lease problem. The agency said that missing fact would have affected the employee’s assessment of the adjustment.

Recurring Expenses Kept the Label

The order also identified expenses carried as TSI in the first quarter of fiscal 2020 that were inconsistent with the company’s public definition. The company labeled some recurring costs “special audit fees,” including fees above a certain level for its required integrated audit. Other challenged costs covered a new lease-accounting standard, potential divestitures that never closed and part of a settlement with a former executive. For someone familiar with the work, the question was what those costs had to do with the explanation investors received.

How Much Did the Adjustments Change DXC’s Earnings?

The Securities and Exchange Commission alleged material overstatements of non-GAAP net income in three quarters. For the second quarter of fiscal 2019, DXC reported $573 million, overstated by at least $29 million. We see that single quarter’s alleged overstatement beside the $8 million penalty for the entire action.

For the fourth quarter of that fiscal year, it reported $589 million, overstated by at least $30 million. For the first quarter of fiscal 2020, it reported $472 million, overstated by at least $24 million.

The agency said these figures mattered to investors deciding whether to purchase DXC securities. During the period covered by the order, the company offered shares through employee benefit plans, issued restricted stock as incentive compensation and made public debt offerings.

What Did the SEC Require DXC to Change?

DXC agreed to a cease-and-desist order and to develop policies and disclosure controls specifically addressing its non-GAAP reporting. The Securities and Exchange Commission’s settled findings described negligent violations involving misleading statements, reporting and disclosure controls.

The order required accurate descriptions of the measures and consistency between those descriptions and the company’s process for identifying, reviewing and approving adjustments. It also required periodic, documented policy review by the disclosure committee or another responsible committee, and documented classification approvals by controller’s-group staff familiar with the reporting requirements and DXC’s policy. Negative comments in internal certification surveys had to receive timely review, consideration and a response.

The order also credited DXC’s cooperation and remedial work, including review of TSI practices, improved procedures and disclosures, and reduced TSI costs in later quarters. It noted that DXC had replaced nearly all senior executive and financial leadership personnel who had been present during the reporting period.

What Evidence Is Needed for Whistleblowing?

For a concern like DXC’s, useful evidence connects the public definition to the expense, the approval and the response when someone questioned it. Our work on the records behind a reported number follows that connection from transaction records and accounting entries through the close, disclosure review and the published report. A person who knows the contract or the project’s original purpose can explain why the description in the adjustment schedule does not fit.

DXC’s order makes those connections unusually concrete. In the agency’s account, the tax-credit contract tested the explanation given to the controller’s group. The landlord’s earlier decision explained why the relocation cost existed. The certification comments showed that requests for support remained unresolved. We work with the person who knows those records to establish which explanation reached which reviewer and what ultimately reached investors.

In The Significance of Whistleblowing as an Anti-Fraud Measure, published in the Journal of Forensic & Investigative Accounting in 2018, researchers found that 35.9% of the 4,943 occupational-fraud cases with complete data were detected through whistleblowing, compared with 21.4% through internal controls. Here, the Securities and Exchange Commission’s account shows the specific information an employee sought while the formal review continued without it.

Whistleblower Awards and Accounting Information

Eligible SEC whistleblowers can share 10% to 30% of qualifying sanctions collected in an action with monetary sanctions over $1 million. Our page on SEC whistleblower awards explains how the information and recovery connect. Separately, a whistleblower case under the False Claims Act involving fraud against government money can pay 15% to 30% of what the government recovers.

For an accounting insider, the starting point is the adjustment you understand and the records that explain it. We assess that information with you and bring the same focus to reporting securities fraud: what investigators can test, and how your knowledge connects the public number to the business decision.

You Know Why the Cost Was There

If you know the project behind an add-back, or the question that went unanswered before an earnings release, talk with our whistleblower experts about the unexplained adjustment. We build your strongest securities fraud whistleblower case around that knowledge and bring in securities fraud whistleblower lawyers who understand the reporting decisions involved. We stay beside you as the expense, the approval and the public explanation become a case investigators can test.