Software maker and bug buster McAfee has been pinged $50 million for its accounting shenanigans in fiscal 2000 which resulted in a $120 million shortfall and lawsuits over its revenue recognition policy. The SEC had charged McAfee with securities fraud for allegedly inflating cumulative net revenue by $622 million during the period between 1998 and 2000. In 1998 alone, the SEC said, McAfee had overstated revenues by $562 million, a mis-stating its accounts by 131 percent.

McAfee, which has neither admitted not denied any wrongdoing, has agreed not to violate future provisions of US securities laws. As part of the deal, it has to appoint a Securities and Exchange Commission-approved consultant to review its accounting practices. It also has to expand its Ethics First program so that customers, distributors, suppliers and resellers can report anything fishy through its anonymous hotline.

The big fine comes as the SEC announces new guidelines for announced new guidelines for fining companies caught out in fraudulent conduct. It's an issue that has split securities regulators along political lines for some time. In recent years, the SEC commissioners have been divided over whether heavy fines are an effective crime deterrent or whether they actually hurt shareholders. The new guidelines seek to strike a balance between the two camps. A report by Bloomberg talks about how big a deal it was for the rule-makers to find some common ground. Took them long enough!

You can read the SEC announcement here.

The SEC can use penalties to compensate victims for the losses they experienced from fraud under Section 308 of Sarbanes-Oxley, a.k.a the Fair Funds for Investors provision. The SEC's guidelines turn mainly on two points:

(a)"The presence or absence of a direct benefit to the corporation as a
result of the violation. The fact that a corporation itself has
received a direct and material benefit from the offense, for example
through reduced expenses or increased revenues, weighs in support of
the imposition of a corporate penalty. If the corporation is in any
other way unjustly enriched, this similarly weighs in support of the
imposition of a corporate penalty."

(b)"The degree to which the penalty will recompense or further harm the
injured shareholders. Because the protection of innocent investors is
a principal objective of the securities laws, the imposition of a
penalty on the corporation itself carries with it the risk that
shareholders who are innocent of the violation will nonetheless bear
the burden of the penalty. In some cases, however, the penalty itself
may be used as a source of funds to recompense the injury suffered by
victims of the securities law violations."

Other factors to take into account are (c) deterrence (d) how badly innocent parties were hurt (e) whether there was widespread collusion in the offense throughout the organisation (f) intent (g) the degree of difficulty in detecting the offense (h) steps taken by the corporation to fix the problem.