SEC Charges Cloopen Group with Accounting Fraud; Cloopen Avoids Penalties Through Self-Reporting and Cooperation

The Securities and Exchange Commission (SEC) has announced settled accounting fraud charges against Cloopen Group Holding Limited, a China-based cloud communications provider. Formerly trading on the New York Stock Exchange, Cloopen faced allegations of accounting misconduct leading to overstated financial results for the second and third quarters of 2021, along with misleading revenue guidance for Q4 2021.

The SEC's order reveals that two senior managers, responsible for Cloopen’s strategic customer contracts and key accounts department, orchestrated a fraudulent scheme from May 2021 to February 2022. Under intense pressure to meet stringent quarterly sales targets, these managers directed employees to prematurely recognize revenue on service contracts. The misconduct involved recognizing revenue on contracts where work was incomplete or had not even commenced.

In a notable turn, the SEC opted not to impose civil penalties on Cloopen, citing the company's proactive self-reporting of the accounting irregularities, extensive cooperation with the SEC's investigation, and swift corrective actions.

The SEC’s order further details that, upon initiating an internal investigation, Cloopen promptly self-reported the accounting violations within days. The company showcased substantial cooperation, including summarizing interviews of witnesses in China and translating crucial documents initially in Chinese. Cloopen's remedial measures were swift and comprehensive, encompassing the termination or discipline of individuals involved in the fraudulent scheme, a reorganization of implicated departments, enhanced accounting controls, and the recruitment of new finance and accounting personnel with expertise in U.S. generally accepted accounting principles.

Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, emphasized the significance of companies self-reporting potential securities law violations. Grewal stated, “This enforcement action demonstrates what we have said repeatedly: there are real benefits to companies that self-report their potential securities law violations, assist during our investigations, and undertake remedial measures."

Cloopen's prompt actions, including compensation clawbacks from its CEO and CFO, played a crucial role in the SEC’s decision not to impose a civil penalty. The case serves as a testament to the advantages afforded to companies that proactively address accounting discrepancies, cooperate fully with regulatory bodies, and swiftly implement corrective measures.

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