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HUDSON HIGHLAND GROUP, INC. & THE SEC

Another Reason To Worry About Sales & Use Tax Compliance

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SUMMARY FACTS• In March 2003, Hudson Highland (HH) was spun off

from Monster Worldwide, Inc. • HH is in the business of providing professional staffing

and talent management services.• From 2003 to 2007, HH failed to comply with the sales

& use tax compliance laws of various states.• During these years, HH did not implement an adequate

sales and use tax collection and remittance system.• As a result of HH’s poor compliance procedures, the

company became liable for almost $4 million in uncollected sales taxes, which it failed to reserve for in its financial statements.

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JANUARY 10, 2011• Culminating an investigation that began in 2007, The

Securities & Exchange Commission issued an order to Hudson Highland Group, Inc. to “cease & desist.”

• Cease & desist from violating Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934

• Section 13(b)(2)(A): requires reporting companies to keep books & records “in reasonable detail” to accurately reflect transactions and dispositions of assets.

• Sec. 13(b)(2)(B) requires reporting companies to maintain internal controls sufficient to provide reasonable assurances that transactions are recorded accurately to permit preparation of financial statements in accordance with GAAP.

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MECHANICAL DIFFICULTIES• States tax services differently. Some states tax HH’s

services (CT, PA); some do not (CA, NJ), and the tax rates vary from jurisdiction to jurisdiction.

• The SEC determined that HH did not have “accounting software capable of calculating the amounts of sales taxes owed.”

• In addition to failing to deal with the complex nature of administering Sales & Use tax compliance in various states, HH was not even managing the most basic aspects of compliance.

• HH was not able to calculate tax based on the location of the work performed.

• HH also did not effectively track customer direct pay permits.

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SYSTEMIC ISSUES @ HH• Staff turnover was a huge problem at the company.• In 2004 a large accounting firm was hired to identify

HH’s reserve issues and fix the broken compliance process.

• The accounting firm accomplished little because HH staff could not provide them with needed documents.

• In 2004 HH also had problems implementing a new PeopleSoft accounting and management reporting system.

• With complex state tax regulations to understand and apply to a business, it was critical that a knowledgeable accounting staff be hired and retained by HH. They did not and this was a major contributing factor to the company’s woes.

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COMPLIANCE AUDITS• State compliance audits at the end of 2005 caused HH

to assign their Tax Manager to quantify exposure.• That manager encountered many of the same problems

the accounting firm had with records retrieval.• The result was the same and reserves that were

calculated were not sufficient.• In early 2006, a newly hired company CFO, together

with HH’s upper management, began to closely monitor the efforts to book adequate reserves.

• It was not until the second quarter of FY 2008; however, that adequate reserves were booked.

• The SEC penalized HH $200,000.

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WHAT DOES THIS SEC ACTION MEAN?• HH received one Wells Notice from the SEC in March of 2009 and

one in September of 2010.• The SEC had been looking into HH accounting records since at

least, 2007.• HH represents an extreme case of accounting failures at all

levels.• HH’s compliance problems and its inability to reconcile its

exposure to is balance sheet spanned approximately seven years.• This penalty is clear evidence that the SEC considers the

reporting of sales tax reserves to be a significant issue.• It adds another reason, in addition to state taxes, interest,

penalties, and state legal action, that publically traded companies have to be in compliance with state tax laws AND they must retain the qualified employees needed to implement and carry out effective compliance efforts.