Private Equity Compliance by Jason A. Scharfman

Author:Jason A. Scharfman [Scharfman, Jason A.]
Language: eng
Format: epub
ISBN: 9781119479642
Published: 2018-09-12T00:00:00+00:00

D. Misallocated Expenses

From at least 2005 to January 2013, PCS and CTS shared numerous annual expenses. While generally the shared expenses were properly allocated and documented in certain instances, a portion of the shared expenses was misallocated and went undocumented, which resulted in one portfolio company paying more than its share of expenses that benefitted both companies.

Prior to the integration of PCS and CTS, PCS utilized administrator services to assist with payroll and 401(k) benefits. PCS paid these administrators a fee for the services they provided.

After PCS and CTS were integrated, management decided to use PCS's third-party administrators to provide payroll services, and to administer the 401(k) programs for both PCS's and CTS's employees. Notwithstanding the fact that the related administrative expenses covered CTS employees, PCS paid all of the administrative expenses for at least eight years and did not receive any reimbursement from CTS. During this eight-year period, the estimated administrative expenses paid by PCS averaged approximately $25 000 annually.

In addition to these administrative expenses, there were several employees who performed work that benefitted both PCS and CTS, but their salaries were not allocated between the two companies, as required under the policy.

PCS's wholly owned Singapore subsidiary performed services for, and sold supplies and parts to, CTS at cost. For example, in 2011 PCS Singapore sold approximately $150 000 in supplies and parts to CTS at cost. However, CTS did not contribute to the general overhead costs of running the Singapore subsidiary. Notably, there were PCS Singapore employees devoted solely to performing work for CTS. CTS reimbursed PCS for the salaries of those specific employees but did not pay any of the costs associated with their office space, their computers, or the local business licenses that PCS had to maintain in order to do business in Singapore.

When PCS and CTS were sold in January 2013, PCS's and CTS's then-existing executives were paid transaction bonuses. LEF, which owned PCS, paid 10% of the transaction bonuses of two executives who were solely CTS employees.

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