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A week after the Plug Power enforcement action, the SEC announced settled charges against Fluor Corporation and five current and former officers and employees alleged to have caused Fluor’s violations. Fluor agreed to pay a civil penalty of $14.5 million and the officers and employees agreed to penalties ranging from $15,000 to $25,000.

Unlike Plug Power, the SEC’s investigation predated the company’s decision to restate. The investigation was prompted by Fluor’s August 2019 announcement of “$714 million in pre-tax charges stemming from an ‘operational and strategic review’ of sixteen projects.” As a result of the SEC’s inquiry, Fluor undertook an internal investigation in 2020 that identified material weaknesses in ICFR and material errors in its financial statements, causing the company to restate its annual and quarterly financial statements for 2016 through the third quarter of 2019. Here’s a summary of the accounting failures from the SEC’s announcement:

The SEC’s order found that Fluor, a global engineering, procurement, and construction company, bid on the two projects relying on overly optimistic cost and timing estimates and subsequently experienced cost overruns that worsened over time. Fluor then failed to sufficiently maintain internal controls to account for the projects in accordance with the percentage of completion accounting method under U.S. generally accepted accounting principles (GAAP). According to the SEC’s order, 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. Additionally, Fluor 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.

The SEC’s press release stressed the importance of appropriate estimates — and the SEC’s continued focus on controls and recordkeeping.

“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 Carolyn Welshhans, Associate Director in the Division of Enforcement. “We will continue to hold companies and individuals accountable for serious controls failures and resulting recordkeeping and reporting violations.”

– Meredith Ervine