Shares of Syneos Health (NASDAQ:SYNH) are down 19.7% at 1:40 p.m. EST because the U.S.Securities and Exchange Commission (SEC) is investigating the company's "revenue accounting policies, internal controls, and related matters." The agency wants documents that date back to the beginning of 2017.
Syneos Health helps drug companies develop and sell their drugs; the projects often take multiple quarters to complete. One possibility is that Syneos and the SEC disagree on how much revenue from the contracts should be accounted for in each quarter, so Syneos might have to restate its earnings from previous quarters, but the revenue would eventually be booked in future quarters.
Or it could be something else. Without further information, it's hard to know how serious the investigation will end up being.
Syneos also said that it needs additional time to complete its 2018 10-K, the end-of-the-year filing with the SEC. The company says management needs additional time to "conduct a review of the company's internal control over financial reporting."
Delaying the filing seems prudent. Worst-case scenario, the SEC determines that Syneos Health has been calculating its finances wrong, and delaying filing for 2018 will allow time to fix it. Best-case scenario, it gives the company time to confirm it's doing everything right. The audit committee for the company's board of directors has also hired outside counsel and accounting advisors to review the company's policies.
With the added risk, Syneos deserves a lower valuation until additional information emerges. If the investigation is relatively minor, today could be a great buying opportunity, but without knowing all the details, buying shares now is more akin to gambling than investing.