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More about SEC
On April 19, 2023, the Securities and Exchange Commission (SEC) announced charges against three executives at Austal USA, a shipbuilder for the U.S. Navy, for allegedly engaging in accounting fraud. The SEC alleges that the executives manipulated the company’s financial statements to meet earnings targets and deceive investors.
Austal USA is a major defense contractor that produces naval vessels for the U.S. government. According to the SEC’s complaint, the three executives – CEO John Rothwell, CFO Peter Stinson, and Chief Accounting Officer Julie Gibson – engaged in a scheme to artificially inflate the company’s revenue and earnings by booking fictitious sales and improperly deferring expenses.
The SEC alleges that the executives began the fraud scheme in 2018 and continued it until at least 2022. They reportedly used various tactics to manipulate the company’s financial results, such as booking sales for vessels that had not yet been delivered or for which payment had not been received. They also allegedly deferred expenses for materials and labor costs associated with vessel construction, which inflated the company’s profits.
In addition to the accounting fraud, the SEC alleges that the executives made false and misleading statements to investors and analysts about the company’s financial performance. They reportedly touted Austal USA’s strong revenue growth and profitability while concealing fraudulent accounting practices.
The SEC’s complaint seeks permanent injunctions, civil penalties, and officer-and-director bars against the three executives. The agency also seeks disgorgement of ill-gotten gains and prejudgment interest.
Reaction from Austal USA and the Industry
Austal USA has not yet stated in response to the SEC’s charges. However, the company has previously disclosed that it was conducting an internal investigation into accounting irregularities. In a press release on January 31, 2023, the company announced that it had identified “significant errors” in its financial statements and would need to restate its earnings for the past three years.
The SEC’s charges against the Austal USA executives will likely send shockwaves through the defense industry, which relies heavily on government contracts and strict compliance with regulations. The case highlights the importance of accurate financial reporting and the risks associated with manipulating financial results to meet earnings targets or boost stock prices.
The defense industry has faced increased scrutiny from regulators in recent years, particularly concerning accounting and billing practices. In 2020, Boeing agreed to pay $2.5 billion to settle charges related to fraud and conspiracy in connection with the 737 MAX aircraft. In 2021, General Electric agreed to pay $200 million to settle charges of accounting fraud.
The Austal USA case is a reminder that even major defense contractors are not immune from the consequences of accounting fraud. The SEC’s charges against the three executives signal that regulators will not tolerate financial misconduct, particularly when it involves companies that play a critical role in national security.
Implications for investors
The SEC’s charges against the Austal USA executives are a stark reminder of the risks associated with investing in individual stocks. Investors who own shares in Austal USA may see their holdings decline in value as a result of the accounting fraud allegations and the company’s restated financial statements.
Investors should also be cautious about investing in companies that rely heavily on government contracts or operate in heavily regulated industries. These companies may face greater scrutiny from regulators and a higher risk of financial misconduct.
Investors who suspect accounting fraud or other financial misconduct should report their concerns to the SEC or other regulatory agencies. The agency has a whistleblower program that offers rewards to individuals who provide information about securities violations.
The Securities and Exchange Commission today charged three executives of Mobile, Alabama-based shipbuilder, Austal USA LLC, for orchestrating a fraudulent revenue recognition scheme that allowed its parent company to meet or exceed analyst expectations.
The SEC alleges that, from at least January 2013 through July 2016, Austal USA’s former president, Craig D. Perciavalle, its current director of financial analysis, Joseph A. Runkel, and former director of the Littoral Combat Ships program, William O. Adams, engaged in a scheme to artificially reduce the cost estimates to complete certain shipbuilding projects for the U.S. Navy by tens of millions of dollars. The complaint alleges that Perciavalle, Runkel, and Adams knew that Austal USA’s shipbuilding costs were rising and higher than planned, but they directed others to arbitrarily lower the cost estimates to meet Austal USA’s revenue budget and revenue projections.
The complaint further alleges that Austal USA’s parent company, Australia-based Austal Limited, prematurely recognized revenue and, as a result, met or exceeded analyst consensus estimates for earnings before interest and tax (EBIT), a key financial metric for the company.
Conclusion
We allege that Austal USA’s executives manipulated its financial results, causing harm to U.S. investors in the securities of its parent company, Austal Limited,” said Jason Burt, Regional Director of the SEC’s Denver Regional Office. “As the complaint articulates, if the defendants had not fraudulently manipulated the cost estimates, Austal Limited would have missed, by wide margins, analyst consensus estimates for EBIT.”
The SEC’s complaint, filed in the U.S. District Court for the Southern District of Alabama, alleges that Perciavalle, Runkel, and Adams violated the antifraud provisions of the Securities Exchange Act of 1934 and seeks disgorgement plus prejudgment interest, civil money penalties, and officer and director bars.
The SEC’s investigation was conducted by Kimberly Steckling, Kenneth Stalzer, and Donna Walker and supervised by Ian Karpel, Nicholas Heinke, and Jason Burt. The litigation is being led by Sharan Lieberman and Christopher Martin and supervised by Gregory Kasper.
