The U.S. Securities and Exchange Commission (SEC) recently announced that a Houston-based technology solutions company has agreed to pay a $2.5 million penalty to settle charges that it overstated profits in one of its business segments. Also, two then-executives at the company agreed to settle charges that they caused the violations to meet internal targets.
The agency found that after being pressured to improve the financial performance of the energy infrastructure segment at FMC Technologies Inc. (NYSE: FTI), the segment’s controller Jeffrey Favret and a business unit controller Steven Croft artificially reduced the value of a liability the company recorded for employee paid time off.
The improper adjustments overstated the segment’s pre-tax operating profits by $800,000 and enabled an internal target to be met for the first quarter of 2013. Without informing the company’s controller, Favret and Croft also corrected a $730,000 error recorded in 2012 that increased their segment’s operating results for first quarter 2013, yet they later signed management representation letters attesting there had been no out-of-period adjustments larger than $250,000 recorded during that period.
Croft failed to comply with internal accounting controls when he directed that his business unit switch to a new accounting system without taking reasonable steps to ensure that errors would not arise as a result. Errors did occur that overstated the segment’s results in two quarterly periods in 2014.
FMC Technologies also had another business unit that failed to properly account for employee paid time off, and the company improperly accounted for interest income associated with certain large intercompany loans, resulting in an $8 million out-of-period adjustment in 2014.
Stephanie Avakian, deputy director of the SEC’s Division of Enforcement, commented:
Companies must accurately report their financial performance without regard to internal targets. Favret and Croft manipulated results to create the impression that the business was performing better than reality.
FMC Technologies, Favret and Croft consented to the SEC’s order without admitting or denying the findings. In addition to the $2.5 million penalty to be paid by FMC Technologies, Favret agreed to pay a $30,000 penalty and Croft agreed to pay a $10,000 penalty.
Favret and Croft, who no longer work at FMC Technologies, also agreed to be suspended from appearing or practicing before the SEC as accountants, which includes not participating in the financial reporting or audits of public companies. The order permits them to apply for reinstatement after two years.