A Houston-based company, FMC Technologies, has agreed to pay a $2.5 million penalty to resolve charges that it overstated profits in one of its business segments, the Securities and Exchange Commission said Thursday.
Two former executives at FMC have also agreed to settle charges that they caused the accounting violations in order for the company to reach internal targets it had set for itself.
Jeffrey Favret, the controller in charge of FMC’s energy infrastructure segment, and Steven Croft, the business unit controller, succumbed to pressure to beef up the segment’s financial performance, artificially reducing the value of a liability for employee paid time off. According to the SEC, they improperly reversed the required accruals to improve the segment’s results. The accounting adjustments overstated the segment’s pre-tax operating profits by $800,000 to meet an internal target for the first quarter of 2013.
Without telling the company’s controller, Favret and Croft also fixed a $730,000 error that had been recorded in 2012 and increased their segment’s operating results for the first quarter of 2013. Within two weeks of discussing the correction, they later signed management representation letters attesting there had been no out-of-period adjustments of over $250,000 recorded during the period ending March 31, 2013.
“Companies must accurately report their financial performance without regard to internal targets,” said Stephanie Avakian, deputy director of the SEC’s Division of Enforcement, in a statement. “Favret and Croft manipulated results to create the impression that the business was performing better than reality.”
The SEC found that Croft failed to comply with internal accounting controls when he told his business unit to switch to a new accounting system without taking steps to ensure errors wouldn’t occur as a result of the change. Errors did occur, however, overstating the segment’s results for two quarterly periods in 2014.
FMC also had another business unit that failed to properly account for employee paid time off, so the company improperly accounted for interest income associated with some large intercompany loans, causing an $8 million out-of-period adjustment in 2014.
FMC, Favret and Croft all agreed to the SEC’s order without admitting or denying the findings. Along with the $2.5 million penalty that the company is paying, Favret will pay a $30,000 penalty and Croft agreed to pay $10,000. Favret and Croft, who are both CPAs, no longer work at FMC, but they 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. They are allowed to apply for reinstatement in two years.
