Oracle hit with whistleblower suit - does it matter?

Den Howlett Profile picture for user gonzodaddy June 1, 2016
Summary:
Oracle got slapped with a whistleblower suit. It is early days but the suit holds particular dangers that Oracle has to address.

I've been asked multiple time today to comment on the lawsuit brought by a former Oracle employee (PDF) where the plaintiff seeks protection under US whistleblower laws.

I'm going to say right off the bat that regardless of the veracity of this person's claims, we have almost no detail to go upon other than a sketchy outline in the court documents. We have not received any proofs in the form of emails or documents, although there is plenty of Silicon Valley gossip to suggest that the claims have merit. Therefore, we cannot take a position and would not do so unless there was clear and unequivocal evidence one way or the other as agreed with a clutch of lawyers skilled in these matters. And I say that as someone who has been a witness in fraud trials and know how they go.

What do we know so far and why does it matter?

According to the court document filed:

9. Plaintiff’s tenure at ORACLE, where she worked as a Senior Finance Manager, North America SaaS/Cloud Revenue, came to an abrupt end because she resisted, refused to engage in and threatened to blow the whistle on accounting practices she reasonably believed to be unlawful. Upper management was trying (and trying to push her) to fit square data into round holes, in an effort to bolster ORACLE Cloud Services financial reports that would be paraded before company leadership as well as the investing public.

10. An experienced CPA, auditor and finance professional, Plaintiff was well aware of Sarbanes-Oxley controls and directives to adhere to Generally Accepted Accounting Principles (“GAAP”). Mindful of these rules, Plaintiff diligently performed her duties and received a positive performance review in August 2015. The following month, however, her supervisors charted a course that veered from legal, ethical and company standards.

11. Plaintiff’s superiors instructed her to add millions of dollars in accruals to financial reports, with no concrete or foreseeable billing to support the numbers, an act that Plaintiff warned was improper and suspect accounting. She told her supervisor, “I will blow the whistle” if ordered to proceed further in this fashion.

12. The data, she knew, would end up in SEC filings and be touted on earnings calls, used to paint a rosier picture than actually existed on the ground. Dollar amounts that might seem modest on their face would propagate through other data, influencing a host of statements on reports made to the investing public. Executives above her in the chain of command went ahead and added accruals on their own; once again, Plaintiff objected. She expressed serious misgivings about their plans for re-accruals as well. A supervisor instructed her to ignore the absent billings that she had pointed out, because his intention was to re- accrue. After confronting him about the dangers of a lack of billings, and the history of bad accruals that never resulted in billings, the supervisor told her that her statements were "irritating." In addition to supervisors, a fellow finance manager and the company's assistant controller were on notice of Plaintiff's concerns. As Plaintiff continued to resist and warn of the accounting improprieties, she became more of a roadblock than a team player who would blindly generate financial reports using improper bases in order to justify the bottom lines that her superiors demanded to see.

13. Within weeks, on October 15, 2015, the company terminated Plaintiff’s employment.

In this case, the plaintiff is claiming what might be commonly called 'unfair dismissal,' is seeking damages and protection under the whistleblower provisions embodied in US law. The plaintiff is also seeking resolution by trial, indicating she wants this to become a matter of public record.

What Oracle tells us

White coat and hand holding cloud on technology background © twobee - Fotolia.com
Here is what I  know and can disclose about how Oracle looks at cloud revenue based upon presentations Oracle has made to myself and others under non-disclosure.

Oracle looks at customers in several ways. First, there are the customers it already counts for one or other business unit and to which it can return. Those customers may well be offered favorable terms for switching to cloud products. Then there are the customers that it captures from other vendors. Finally, there are the green field customers it acquires where there has been no past relationship with Oracle. There are always background questions about the way Oracle (and other software vendors for that matter) count 'customer' but to date, no-one in the analyst community has had the balls to outright ask the obvious questions in the public domain of any software vendor.

To its credit, the company was transparent with us about how those puzzle pieces come together and as I have hinted at in the past, I've been impressed with the way Oracle has successfully gone after mid-market HR customers. The financial apps cloud business is relatively new but even there, I have been surprised how many logos it has picked up from customers moving up from the world of Sage and Quickbooks. For reasons of confidentiality, I am not allowed to reveal the exact composition of those numbers and even if I did, they would likely be wrong since it is some months since we had that set of conversations and this market moves quickly enough as it is without my muddying the waters with out of date information.

However, there are some consistencies in the Oracle data over time and that at least provides watchers with a sense of direction. And to be 100% on this, the data Oracle has shared with myself and colleagues MUST be the same it shares with any other analyst or analyst community, whether that is industry or financial. There is no wiggle room here under any of the laws governing disclosures that have a financial flavor.

All of that is fine and, as long as you understand what is going on and can get the validation from other sources, then there really should be no cause for a major investigation. Having said that, some analysts like to play up differences in approach to measuring revenue among vendors for reasons that at time make no sense to me other than to keep the competitive fires burning.

I have said this on many occasions but it is worth repeating: the cut and thrust of Silicon Valley sniping among vendors makes for great inside baseball fun but is of absolutely no interest to buyers. Period. If anything, it serves as a deterrent, creating uncertainty and playing into people's trust issues with software vendors.

The lawsuit

On to the lawsuit.

The plaintiff is making an altogether different accusation. She is alleging that Oracle is 'padding' its figures with numbers that are a fiction. She implies the numbers are small and that these would cascade through to reported numbers. She does not say that the numbers HAVE cascaded through, and from the anticipated denial, you can be sure that is what Oracle believes. Anything else is a straight fraud and Oracle knows that. It would not be the first time I have heard or seen such activity and it should be relatively easy to prove. In this case, the plaintiff has to show a direct and causal link between what she complained of internally and her dismissal. These cases are not easy to disentangle at the best of times and in this case are likely all the more difficult because we do not yet know the facts leading up to the complaint and afterwards.

Either way, and assuming there is enough substance for a court to hear the case, then this will represent unwelcome attention for Oracle. Not for the dismissal issue but for the whiff of fraud that is swirling around this case. Make no mistake though, every company I've spoken to ties Sarbanes-Oxley deadly seriously and a breach of those rules is a serious matter.

I have already noted that the SEC is sharpening its claws on the question of non-GAAP earnings. It will have no hesitation in dropping on Oracle like a ton of bricks if there is any hint that the plaintiff is speaking with clear knowledge of wrongdoing.

As an ex-investigative accountant with court experience, history teaches me that unless there is unequivocal proof that there is a one off incident in play or a malicious play by a disgruntled employee, then the light smoke of a few million dollars - a fraction of a rounding error in Oracle terms - can easily lead to an out of control bushfire. It can also get very, very messy. Think SEC fines, class action lawsuits and the like.

Regardless, this is a very dangerous position that Oracle will need to handle extremely carefully and with appropriate haste. Blanket denials at this stage are fine but they won't wash forever. Also note that Oracle has a whistleblower policy in place.

The bigger picture

This is the point when I climb back on my non-GAAP hobby horse.

There are too many ways in which vendors can massage their figures to show a picture of their choosing, all of which are legal. The trouble is that the non-GAAP methods used to arrive at certain figures are rarely as clear cut as many of us would like and therefore we find ourselves comparing apples with bananas on many occasions.

Until such times as the SEC either outlaws or makes crystal clear the kinds of disclosure it expects, then short of whistleblower activity that exposes wrongdoing, the picture will remain murky.

Customers who are impressed by numbers will continue to have a problem knowing who to believe because you can be 100% sure that these topics will come up in selection meetings. Without an understanding of how numbers are constructed then it is relatively easy to mislead anyone trying to  fathom any number. This will have continuing impact in meetings where the arguments about what constitutes cloud and what doesn't become a negotiation or contractual sticking point.

Knowing Oracle's long and interesting history of financial ups and downs, I find it hard to believe that it would risk SEC attention. People make mistakes all the time but as long as those errors are immaterial and are corrected as quickly as they are discovered then no-one should worry beyond being certain that the controls designed to prevent errors are rigorous in their following.

In this case, I have numerous questions swirling around in my mind but until we see more detail about the allegations then enumerating those is pure theater.

In the meantime, potential customers should always sense check what they are being told but also ensure that they get adequate references that answer their most pressing questions.

Image credit - © twobee - Fotolia.com

Disclosure - Oracle is a premier partner at time of writing.

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