Yesterday, the SEC announced a $2.5 million penalty to settle charges against two former officers of Houston-based FMC Technologies. The pair had manipulated accruals of personal time off - PTO - liabilities to improve the appearance of performance at one of the company’s segments, among other flawed accounting practices.
According to the Accounting & Auditing Enforcement Release, the pair achieved their goals by making adjustments to deflate the firm’s accrued “bank” of employee PTO, which employees earned at FMC Technologies on the first day of the year - a rather unusual policy compared to other employers. When the firm acquired several other firms, their PTO liabilities were adjusted to conform to FMC Technologies’ practice. To meet internal profitability targets for one segment, the pair made a number of adjustments to the accrued liability that didn’t fit with the firm’s accounting policy - but improved segment profitability. On top of that, out-of-period adjustments to capitalize already expensed R&D were made; errors from a newly-installed accounting system in one segment overstated revenue for two quarters; and more errors due to flawed remeasurements of foreign currency-denominated intercompany loans, with out-of-period adjustments for intercompany interest to boot.
All in all, a trifecta of accounting nightmares, dealing with three issues of concern for inquisitive investors: squishy discretionary liabilities, segment reporting, and foreign tax issues.