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SEC Files Settled Accounting Case Against FMC Technologies And Two FMC Officers For Books And Records Violations, Without Alleging Fraud
10/31/2016On October 20, 2016, the Securities Exchange Commission (“SEC”) filed a settled civil injunctive action against FMC Technologies, Inc. (“FMC”) that alleged that the company and two of its executives had engaged in books and records violations in connection with an FMC subsidiary’s accruals for employee paid time off (“PTO”). SEC, Company and Former Executives Paying Penalties for Accounting Violations, Rel. No. 2016-221 (Oct. 20, 2016). To settle the SEC’s claims, which did not include allegations of fraud, FMC, its energy infrastructure segment controller, Jeffrey Favret (“Favret”), and one of its business unit controllers, Steven Croft (“Croft”), agreed to pay civil monetary penalties of $2.5 million, $30,000 and $10,000, respectively, without admitting or denying wrongdoing. Favret and Croft each also agreed to be barred from practicing as accountants before the SEC for at least two years.
According to the SEC’s complaint, in May 2012, FMC acquired a company, which it renamed Automation and Control (“A&C”), that FMC subsequently folded into its energy infrastructure segment. FMC allegedly had an atypical PTO policy, whereby employees earn the full PTO allowance on January 1 each year, while A&C previously had a standard PTO policy, whereby employees earn PTO ratably in each pay period. After the acquisition, FMC allegedly required A&C to adopt FMC’s PTO policy, which meant that A&C had to accrue its full-year PTO liability. Because the employees of FMC, and now A&C, received their full PTO on January 1 of each year, Generally Accepted Accounting Principles (“GAAP”), according to the SEC, required that FMC establish a reserve for its full-year PTO liabilities on January 1. A&C’s adoption of this accrual policy allegedly had a significant negative impact on both A&C’s and the larger energy infrastructure segment’s results, causing the head of energy infrastructure to push its employees to make up for the lower revenues. At this point, the SEC claimed, Favret began to question whether it was necessary to record the entire yearly PTO accrual in January. In February 2013, Croft and Favret allegedly decided to revise A&C’s PTO accruals so that they would accrue ratably and, in April 2013, still under pressure from the head of energy infrastructure, decided to eliminate the 2013 PTO accrual entirely. These adjustments resulted in an overstatement of A&C’s pre-tax operating profit by $800,000 during the first quarter of 2013, but allowed A&C to meet its internal targets.
According to the SEC, these changes were made in violation of FMC’s accounting policy and without consulting FMC’s corporate accounting office. In addition, the SEC claimed, the change in methodology and failure to accrue any liability with respect to PTO meant that FMC was not in compliance with GAAP. Despite these deficiencies, Croft and Favret allegedly signed quarterly management representation letters, which stated that FMC’s financials had been recorded appropriately.
The FMC settlement is just the latest action brought by the SEC arising out of audit, accounting and financial reporting misconduct, which has been an area of renewed focus for the Commission since Mary Jo White became Chair in 2013. The settlement is noteworthy, however, because it conspicuously lacks any reference to fraudulent behavior by FMC, Favret, or Croft. Indeed, though the order describes conduct that the SEC claims was designed to manipulate the PTO accrual in order to hit certain internal targets, the order does not claim that anyone engaged in fraud. Rather, the order seems to implicitly acknowledge that the alleged manipulations of the PTO accrual derived, at least in part, from the idiosyncrasies of the manner in which A&C awarded paid time off. Nevertheless, Favret and Croft consented to an industry bar of at least two years as a result of their alleged record-keeping violations.
