Last Wednesday Toronto-based AlarmForce admitted to wrongfully charging certain residential subscribers in certain jurisdictions monitoring fees after they’d cancelled their accounts but before they had returned their equipment. To compensate subscribers, retroactively to August 1, 2013, AlarmForce (TSX: AF) will issue refunds, including interest, to residential subscribers who had been incorrectly charged monitoring fees after their cancellations. In a press release, AlarmForce said it is considering its cancellation and other practices to its current customers in all jurisdictions.

“The company sincerely regrets this inconvenience and is taking steps to ensure that all affected customers will be personally contacted beginning the week of August 29 and continuing for several weeks until impacted customers have been contacted. The company will be reviewing residential contracts covering the period starting on August 1, 2013,” said AlarmForce.

According to AlarmForce’s announcement, the problem was discovered as a part of the company’s due diligence.

“During the course of this review, the company’s cancellation practice was raised as an issue. Upon closer examination, and with the assistance of outside advisors, the company determined that immediate action was required to change the practice to remedy this situation,” the company said.

The company also said that as a result of this change it is undergoing “a detailed examination of its revenue recognition policies” going back to the fourth quarter of fiscal year 2013 to look at revenue generated from customer contracts after a customer had requested cancellation of services. The company said, where legislation prohibits its ability to collect after a subscriber cancels services, it should not have recognized the cancelled subscription revenue. The company said it doesn’t believe it will have the necessary reviews done in time to report the results in its quarterly financials by September 14. This will cause a late filing with the Ontario Securities Commission which causes another set of problems.

In addition, tax authorities in the state of Florida said the company’s contract installers should have been classified as employees, bringing it with it tax implications for AlarmForce. AlarmForce is trying to estimate the cost of those tax implications and reconsidering its classification of contractors versus employees.

In spite of the problems, AlarmForce said it “has been working hard to build a customer-centric organization over the last year and was disappointed to discover the significance of the legacy cancellation and other practices.” The board said it doesn’t believe the issues reflect the intent or practices of current management.

“We have the highest confidence that this team is the one to deliver excellent products and services to our customers and drive shareholder value,” said Michael Brennan, chairman of AlarmForce’s board of directors.

AlarmForce CEO Graham Badum said, “We’ll get this right. Our response to customers and fulfilling our responsibilities as a public issuer is of utmost importance and is how we will build trust and grow market share. Paying attention to the needs of all of our stakeholders in a fair and equitable manner is the only way that we are going to succeed.”

Founded in 1988, AlarmForce provides home security, home automation, two-way emergency response systems and video surveillance across Canada and in select U.S. cities and states. The company currently has 11 major service centers in the U.S. It offers both products and services, with service bundles ranging at $24.99 with $0 down and going up to $49.99 a month with $199 down.

AlarmForce’s investors have reacted negatively to the news. On August 19, before the August 24 announcement, its stock price was $11.25 per share. On Friday, August 26, the stock price fell to $10.43 per share as of 10:19 AM Eastern. This is still higher than its lowest point this year of $9.90 on February 25, 2016. As the company’s review and potential legal and regulatory penalties are disclosed, the stock could dip further.

Insider Take:

In the subscription world, this is a devastating “mistake,” no matter how it happened. Whether the law was misinterpreted in certain jurisdictions or the company was trying to eke extra money out of subscribers who had cancelled its services, this issue is a PR nightmare and could be a costly one for AlarmForce. Not only will its admission put current customers on alert, it will likely turn away potential customers. In addition, as AlarmForce’s policies and financials are reviewed more vigorously, it is possible there will be costly legal and regulatory ramifications.

With annual audits and financial reviews, it is interesting that this problem persisted for at least three years. How could it go on for so long? Why wasn’t this caught sooner, or was it a problem that the company was aware of, but hoped wouldn’t come to light? This is a harsh lesson and one other subscription companies can learn from.

The bottom line is, regardless of how it happened, AlarmForce has hurt its customers and its reputation, and it may not be able to recover from that. Its best bet at this point is to come clean, do its best to make it right, and review each and every customer policy to be sure they are being followed to the letter – and spirit – of the law. Their policies should be transparent, ensuring that subscribers are not overcharged. The company’s handling of the overcharges, and its other legal and financial challenges, should be disclosed to the public, so investors and others can make informed decisions on whether or not to do business with AlarmForce in the future.