Dive Brief:
- The Securities and Exchange Commission said that Fluor, a construction and engineering company, will pay a $14.5 million penalty for accounting violations, including failures in internal controls for two large, fixed-price construction projects.
- Fluor bid on the projects based on overly optimistic cost and timing estimates, the SEC said. The company later faced spiraling cost overruns and failed to maintain internal controls in line with the percentage of completion accounting method under generally accepted accounting standards. Fluor in 2020 restated its financial statements for fiscal years 2016 through 2018 and for several quarters in 2018 and 2019.
- “Dependable estimates and the internal accounting controls that facilitate them are the backbone of percentage of completion accounting and are critical to the accuracy of the financial statements that investors rely on,” Carolyn Welshhans, associate director in the SEC Enforcement Division, said in a statement. “We will continue to hold companies and individuals accountable for serious controls failures and resulting recordkeeping and reporting violations.”
Dive Insight:
Fluor neither admitted nor denied the SEC findings while cooperating with the agency and taking remedial steps, the company said. Five former and current Fluor employees agreed to desist from committing the violations and to pay penalties ranging from $15,000 to $25,000.
“Fluor now has a refreshed board and a new management team that is driving a balanced risk profile and healthy backlog,” CEO David Constable said in a statement.
Due to accounting errors on one project, Fluor overstated its net earnings by as much as 37% from its fiscal year 2016 through the first quarter of fiscal year 2019, the SEC said. By delaying loss recognition on the other project, Fluor overstated its net earnings by 22% in the second quarter of 2018.
For one of the projects, Fluor improperly included in a forecast revenue from unapproved change orders, including orders that had not been submitted to, or had already been rejected by, the customer, the agency said.
For both projects, Fluor failed to include all anticipated costs that were known or should have been known in its forecasts, delaying loss recognition.
Fluor added costs to its financial forecast, or estimate at completion, “only to the extent that the costs could be offset by corresponding added forecasted revenues, which were determined using overly high assumed rates of recovery,” the SEC said.
“The company and the board of directors are pleased to put this investigation behind us,” Constable said.
