Dive Brief:
- Irving, Texas-based global contractor Fluor has agreed to pay a penalty of $14.5 million to settle Securities and Exchange Commission charges stemming from improper accounting on two large-scale, fixed-price construction projects, according to an SEC press release.
- The SEC’s investigation also identified five former and current Fluor officers and employees who agreed to settle charges for causing Fluor’s improprieties, according to the release.
- Fluor settled the matter neither admitting nor denying the SEC’s findings, according to a statement from the company. The public construction firm said it established reserves sufficient to fund the settlement during 2022 and expects no material earnings effect in 2023.
Dive Insight:
In 2020, Fluor restated its financial statements for fiscal years 2016 through 2018 and the quarters ending March 31, 2018, through Sept. 30, 2019, correcting the materially overstated net earnings as a result of the accounting errors on the two projects. Fluor also disclosed that it had identified material weaknesses in its internal control over financial reporting and material errors in its financial statements related to the projects.
The SEC’s order found that Fluor bid on two projects relying on overly optimistic cost and timing estimates.
That led to cost overruns that continued to worsen over time, according to the SEC. Fluor then failed to sufficiently maintain internal controls to account for the projects in accordance with the percentage-of-completion method under generally accepted accounting principles, according to the SEC.
In addition, Fluor failed to include all anticipated costs that were known or should have been known in each project’s respective forecasts, thereby delaying loss recognition on each, according to the SEC order. Fluor also improperly incorporated revenue from unapproved change orders in the forecasts of one of the projects, including change orders that had not yet been submitted to, or had already been rejected by, the customer, according to the SEC.
For example, the accounting errors on one project caused Fluor to materially overstate its net earnings by as much as 37% from the company’s fiscal year 2016 through the first quarter of its fiscal year 2019, according to the SEC.
In addition, the delayed loss recognition on the second project caused Fluor to overstate its net earnings by 22% in the second quarter of 2018, per the release. As a result, Fluor materially misstated the financial statements included in its periodic filings with the SEC, said Carolyn Welshhans, associate director in the SEC’s division of enforcement.
“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,” said Welshhans. “We will continue to hold companies and individuals accountable for serious controls failures and resulting recordkeeping and reporting violations.”
The five former and current Fluor officers and employees consented to ceasing and desisting from committing or causing future violations and to pay penalties ranging from $15,000 to $25,000. Those individuals are:
- Bradley R. Scott, current Fluor business-line CFO.
- Robin K. Chopra, former chief accounting officer and controller.
- James F. Brittain, a former business-line president.
- Jon Eric Best, a former business-line CFO.
- Kent N. Smith, former Fluor business-line senior vice president.
Fluor also paid $33 million in November in a securities fraud class action settlement between the company and its investors. Investors accused Fluor of misleading them about construction bidding strategy and scheduling, according to the order.