Category: Accounting and Auditing

SEC charges Fluor with improper accounting and inadequate internal accounting controls

In this Order, the SEC brought settled charges against Fluor Corporation, a global engineering, procurement and construction company listed on the NYSE, in connection with alleged improper accounting on two large-scale, fixed-price construction projects. Five current and former Fluor officers and employees were also charged. (The press release includes links to the orders for the five individuals.) Fixed-price contracts mean that cost overruns are the contractor’s problem, not the customer’s, and Fluor’s bids on the two projects were based on “overly optimistic cost and timing estimates.”  When Fluor experienced cost overruns, the SEC alleged, Fluor’s internal accounting controls failed, with the result that Fluor used improper accounting for these projects that did not comply with the percentage-of-completion accounting method under GAAP, leading Fluor to materially overstate its net earnings for several annual and quarterly periods. A restatement ultimately followed. Fluor agreed to pay a civil penalty of $14.5 million and the officers to pay civil penalties between $15,000 and $25,000.  According to the Associate Director in the Division of Enforcement, “[d]ependable 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….We will continue to hold companies and individuals accountable for serious controls failures and resulting recordkeeping and reporting violations.”

Are springing penalties a thing? SEC charges Plug Power with accounting, reporting and control failures

In this Order, the SEC brought settled charges against Plug Power, Inc., a provider of green hydrogen and hydrogen-fuel-cell solutions, for financial reporting, accounting and controls failures in connection with a variety of the Company’s complex business transactions. The failures required Plug to restate its financial statements for several years.   In the restatement, Company management identified a material weakness in internal control over financial reporting and ineffective disclosure controls and procedures, allegedly “due to Plug Power’s failure to maintain a sufficient complement of trained, knowledgeable personnel to execute their responsibilities for certain financial statement accounts and disclosures.  Despite these control deficiencies, the Company raised over $5 billion from investors during the relevant Filing Period.” According to the SEC, Plug’s “material weakness in ICFR and ineffective DCP have not been fully remediated,” and the Company is continuing its remediation efforts. Plug agreed to pay a civil penalty of $1.25 million and to implement a number of undertakings, including an undertaking “to fully remediate the Company’s material weakness in ICFR and ineffective DCP within one year” of the SEC’s Order.  Should Plug fail to comply with those undertakings, the Company will be required to pay a “springing penalty,” an additional civil penalty of $5 million.

SEC Chief Accountant warns against narrow focus in risk assessments

In this Statement, The Importance of a Comprehensive Risk Assessment by Auditors and Management, SEC Chief Accountant Paul Munter cautions auditors and company managements against conducting risk assessments that focus too narrowly “on information and risks that directly impact financial reporting, while disregarding broader, entity-level issues that may also impact financial reporting and internal controls.” Similarly, auditors and managements may sometimes dismiss isolated incidents, perhaps as a result of confirmation bias, without adequately analyzing whether these issues might be indicative of larger issues that require responsive action and disclosure. Munter warns that “[s]uch a narrow focus is detrimental to investors as it can result in material risks to the business going unaddressed and undisclosed, thereby diminishing the quality of financial information.” Management, Munter warns, must “take a holistic approach when assessing information about the business and avoid the potential bias toward evaluating problems as isolated incidents, in order to timely identify risks, including entity-level risks.” Managements and audit committees may want to take note.

SEC finds Forms 12b-25 not up to snuff

Earlier this week, the SEC announced settled enforcement actions against five companies for deficient disclosure in Forms 12b-25 that they filed regarding late reports. Why?  On the heels of filing those Forms 12b-25, the companies announced financial restatements or corrections that were not even alluded to in those late notification filings. Over two years ago, the SEC charged eight companies for similar violations detected through the use of data analytics in an initiative aimed at Form 12b-25 filings that were soon followed by announcements of financial restatements or corrections. (See this PubCo post.)  Apparently, the SEC believes that companies are still flubbing this one and does not seem to consider these errors to be just harmless foot faults.  In connection with the 2021 enforcement actions, the Associate Director of Enforcement hit on a central problem from the SEC’s perspective with deficiencies of this type: “In these cases, due to the companies’ failure to include required disclosure in their Form 12b-25, investors relying on the deficient Forms NT were kept in the dark regarding the unreliability of the company’s financial reporting or anticipated material changes in operating results.” These charges should serve as a reminder that completing the late notification is not, to borrow a phrase, a trivial pursuit and could necessitate substantial time and attention to provide the narrative and quantitative data that, depending on the circumstances, could be required. 

In discussions of inflation, SEC staff want the details

According to a review of SEC staff comments by Bloomberg, Corp Fin staff have been weighing in to remind companies about the need to discuss, in SEC filings, the material impact of inflation—and don’t forget the details.  No doubt you remember that Item 303 of Reg S-K used to include an express requirement to discuss the impact of inflation and changing prices on net sales, revenues and income from continuing operations, but that provision was eliminated as part of the MD&A modernization project in 2020. (See this PubCo post.) Of course, at that point we hadn’t had any real inflation for years.  Then the SEC removed the explicit requirement and what do we have?  Inflation, of course—up to 9% in June 2022.

IAASB proposes new assurance standard for climate disclosures

A 2021 article in the WSJ about carbon emissions identified “[o]ne problem facing regulators and companies: Some of the most important and widely used data is hard to both measure and verify.” According to an academic cited in the article, the “measurement, target-setting, and management of Scope 3 is a mess.” As a result—and as the term “greenwashing” brings to mind—investors and other stakeholders are frequently apprehensive about the reliability of corporate disclosures regarding sustainability. One approach to address this concern is to obtain assurance to verify the data. However, the WSJ suggested that, based on data regarding verification of climate information provided on a voluntary basis, audits are a challenge. For one reason,  verification of ESG data “is generally less rigorous than the external audits required for financial reporting.”  Moreover, there is “no set standard for how climate data should be verified, or by whom.” That may be about to change—internationally, that is. Will the U.S. follow suit?

FASB wants more disclosure about expenses

FASB is moving ahead with new requirements for more information about public company expenses, approaching the issue from two perspectives: disaggregation of income statement expenses and segment reporting. More specifically, this week FASB published  a proposed Accounting Standards Update intended to provide investors with more decision-useful information about expenses on the income statement.  According to the press release announcing the proposed ASU, investors have said that more detailed information about a company’s expenses “is critically important to understanding a company’s performance, assessing its prospects for future cash flows, and comparing its performance over time and with that of other companies.”  In addition, last week, FASB made a tentative decision to go forward with new requirements for enhanced disclosure about segment expenses and other segment items, and directed the staff to draft a final ASU for vote by written ballot. FASB had previously explained that investors find segment information to be critically important to understanding a company’s different business activities, as well as its overall performance and potential future cash flows. Although financial statements do provide information about segment revenue and a measure of profit or loss, not much information is disclosed about segment expenses. 

SEC’s Investor Advisory Committee discusses audit committee overload and disclosure

In May,  SEC Chief Accountant Paul Munter, quoted here,  cautioned his conference audience about the potential for audit committee overload. “More demands are being put on audit committees, sometimes on topics outside their core responsibility,” he said. “Audit committees need to be continually vigilant that they have enough time to focus on their core mission—protecting investors—and don’t let other topics cloud that out.” While the AC’s primary responsibilities are generally thought to be oversight of financial reporting, including the audit of a company’s financial statements and internal control over financial reporting, these days, the AC often becomes the default committee of choice for oversight of other emerging risks, such as cybersecurity and even ESG. With ACs now perhaps the “kitchen sink of the board,” are its members stretched too thin to carry out fundamental responsibilities? Are members being asked to operate outside of their core skillsets? What is the impact? These concerns appear to have prompted the panel at last week’s meeting of the SEC’s Investor Advisory Committee discussing AC workload and transparency.

SEC charges improper revenue recognition practices—still a hot topic for SEC Enforcement

Last month, Cornerstone Research told us that accounting and auditing enforcement activity by the SEC in FY 2022 increased by 55% over the prior fiscal year to 68 enforcement actions, 25 of which alleged improper revenue recognition.    Among the actions involving accounting restatements, 63% involved allegations regarding revenue recognition and internal control over financial reporting.  We also saw a steep increase in actions against individuals, reportedly reflecting the emphasis of SEC Chair Gary Gensler on imposing individual accountability. (See this PubCo post.)  With this new SEC Order charging USA Technologies, Inc., now known as …er… Cantaloupe, Inc.—clearly someone’s favorite fruit—with improper revenue recognition practices and ICFR violations, the SEC continues that trend.  For their roles participating in these improper activities, the SEC also brought actions against USAT’s former VP of Sales and Marketing and its former Chief Services Officer. 

Steep increase in accounting enforcement activity reported —especially against individuals

In this report from Cornerstone Research, SEC Accounting and Auditing Enforcement Activity—Year in Review: FY 2022, Cornerstone tells us that accounting and auditing enforcement activity by the SEC increased sharply in FY 2022, although surprisingly, the aggregate amount of monetary settlements declined sharply. Perhaps most interesting is the steep increase in actions against individuals, reportedly reflecting the emphasis of SEC Chair Gary Gensler on imposing individual accountability and perhaps, by extension, spurring action by executives to prevent misconduct at their companies. The report found that over “half of all actions involved individual respondents only, a sharp increase from the FY 2017–FY 2021 average of 37%. Following Chair Gary Gensler’s swearing-in [in April 2021] through the end of FY 2022, approximately 49% of actions were initiated against individual respondents only.”  According to one of the co-authors of the report, “[u]nder Chair Gensler’s leadership, the SEC has identified ‘holding individuals accountable’ as a ‘key priority area’ in its enforcement program”…. So, it is not a surprise that the percentage of actions initiated against individual respondents in FY 2022 was notably higher than those actions initiated during Jay Clayton’s administration.”