The U.S. Securities and Exchange Commission announced Monday that Houston-based KBR employed insufficient financial controls and procedures that resulted in the global engineering and construction company overstating in publicly-filed documents a projected $459 million in scheduled revenues in 2013.
In official records made public Monday, the SEC reports that KBR overstated a key financial performance metric called “backlog” that allows companies to inform investors about guaranteed work contracts. The backlog reports are used by investors and analysts to help gauge future financial performance.
Lawyers in the SEC’s Fort Worth Regional Office say KBR has agreed to pay $2.5 million in fines for their conduct and agreed to never do it again.
“Non-financial statement metrics such as backlog can provide additional insight to investors regarding a company’s performance,” said SEC Regional Director Shamoil Shipchandler in Fort Worth. “To the extent that companies disclose these kinds of metrics, companies must ensure they are accurate and not misleading.”
In a 10-page document filed with an administrative law judge for the SEC, the agency states that KBR listed $459 million in its publicly disclosed backlog for one of seven contracts it entered into to complete pipe fabrication and modular assembly contracts in Canada.
The SEC argues that KBR had not obtained a guarantee from the other company that it would contract with KBR to do the work, which violated KBR’s internal reporting policies and misled investors by overstating its work in backlog.
KBR continued to overstate its backlog for almost two years, until the company issued a restatement in 2014, the SEC claims.
“Restated earnings, which resulted in charges of $156 million, primarily arose
from failures in KBR’s Canada business to make accurate and reliable estimates
of the costs to complete seven pipe fabrication and modular assembly contracts in Canada,” the SEC states. “KBR Canada experienced rapid growth in 2012 and 2013, and it did not have sufficient resources or sufficiently trained project managers, project controls personnel, and accounting and executive management professionals to perform cost estimates and project oversight reviews.”
Vinson & Elkins partners John Wander in Dallas and Jeff Johnston in Houston represent KBR in the matter.
“We are pleased that this legacy issue has reached final resolution,” the company said in a press release late Monday afternoon. “KBR takes seriously the accuracy and integrity of our financial statements and we operate under the strongest of financial controls to ensure the veracity of our financial reporting.”
The SEC’s investigation was conducted by Keefe Bernstein, Julia Huseman, and Carol Stumbaugh of the Fort Worth Regional Office. The case was supervised by Barbara Gunn and Eric Werner. The SEC said that the Alberta Securities Commission played a key role in the investigation.