Fluor Corp. has agreed to pay $14.5 million to resolve a U.S. Securities and Exchange Commission investigation for alleged “improper accounting” and "overly optimistic" cost and timing estimates in bidding two legacy fixed-price projects that forced the company to restate its 2020 financial results, the agency said on Sept. 6.
The commission said Fluor's reliance on the estimates was problematic when it "subsequently experienced cost overruns that worsened over time.” The firm “then failed to sufficiently maintain internal controls" to account for project charges and correctly state company net earnings.
Five current and former officers and employees of the Irving, Texas-based firm also agreed to settle charges for causing the violations, SEC said. They are Bradley R. Scott, a 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, former Fluor business-line CFO; and Kent N. Smith, a former business-line senior vice president.
In a statement, Fluor said it established reserves in 2022 "sufficient to fund the settlement ... and expects no material earnings effect during 2023." The SEC agreement follows a previous announcement that the U.S. Justice Dept. "had ended its investigation," the firm said, adding that it “fully cooperated with the SEC" in its review of company financials.
According to Fluor, the SEC probe focused on "accounting errors on legacy risk projects and associated internal controls weaknesses that were remedied in connection with the filing of our 2019 10-K in September 2020." Chairman and CEO David Constable notes a "refreshed" board of directors and new management team "that is driving a balanced risk profile."
He joined the firm as CEO in early 2021.
Fluor did not admit or deny SEC findings, said the agency, also noting that the firm’s “remedial acts and cooperation factored into the settlement decision.” According to the commission, the executives also did not admit or deny agency findings, and will pay penalties ranging from $15,000 to $25,000.
The SEC probe related to two projects the company said “are now largely completed."
According to legal documents and media reports, one project involves Fluor design-build work at a U.S. Army ammunition depot in Radford, Va., Fluor overstated its annual net earnings by $51 million (22%) in 2016; by $38 million (25%) in 2017; and $43 million (25%) in 2018, and understated its net loss by $3 million (5%) in the first quarter of 2019, according to SEC.
The other is a Shell U.K. oil and gas project in the North Sea. Fluor managed design and construction of a floating offshore storage and production vessel at the site off the coast of England. The final subcontract terms were “significantly more expensive” than Fluor had either anticipated or budgeted for in its contract bid, according to SEC. It says Fluor’s delayed recognition of its loss for two quarters resulted in the company overstating net earnings by $17 million (22%) in the second quarter of 2018.
Fluor did its own probe of the accounting misstatements and in 2020 restated its financials for fiscal years 2016 through 2018 and the quarters ending March 31, 2018, through Sept. 30, 2019, correcting the materially overstated net earnings.
McDermott Ex-Execs Also Probed
The Fluor settlement follows one in June by SEC involving two former top executives of contractor McDermott International—former CEO David Dickson, who left the firm in 2021, and ex-CFO Stuart Spence, who left in 2019. The agency review of its financials stemmed from the executives' role in improperly approving in 2018 a quarterly loss forecast "and related disclosures" for EPC work on the estimated $6.7-billion Cameron LNG export terminal project in Hackberry, La., SEC said.
The work was done under a joint-venture contract awarded to McDermott in 2014 with contractor Chiyoda.
Without admitting or denying SEC findings, Dickson and Spence each agreed to a cease-and-desist order that includes civil penalty fines of $100,000 and $40,000, respectively, SEC said.
In a statement at the time, McDermott said it "cooperated with the SEC and is pleased that the investigation has come to conclusion with no action against the company."
Michael McKelvy joined McDermott as CEO in early 2022.
The project, which includes three LNG liquefaction trains with a projected export capacity of 12 million tons per year, began operation in August 2020, said a McDermott announcement.
McDermott also announced this month an agreement with creditors and stakeholders under which it will gain a $250-million cash infusion for operations and begin a process to restructure its debt.