Fluor (NYSE:FLR) has agreed to pay $14.5 million to the US Securities and Exchange Commission (SEC) to settle “improper accounting” on two projects, including the Shell Penguins FPSO.
The deal with the SEC also includes five former and current officers and employees.
The two projects were the design and construction of an FPSO for the Penguins field in the North Sea and a facility for the US army.
The statement from the SEC said Fluor had provided bids that relied on “overly optimistic cost and timing estimates and subsequently experienced cost overruns that worsened over time”.
Fluor noted the agreement neither admitted nor denied the SEC findings. The company does not expect an impact on earnings, as it set aside reserves to cover the penalty in 2022.
Fluor won the contract for Shell’s (LON:SHEL) Penguins FPSO in December 2017, when it was worth $491.7mn.
© Supplied by Sevan SSPThe SEC highlighted problems with the subcontractor bid, which was handling fabrication of the FPSO.
The subcontract was 25% of Penguins’ cost. The binding bid from the subcontractor had expired by the time Fluor submitted its final bid. As a result, the company had to finalise the deal after it had signed the fixed price contract.
By May 2018, Fluor personnel had concluded that the company would make a loss on the FPSO work. The final subcontract terms were “significantly more expensive to Fluor than anticipated the quarter before and as had been budgeted for in the contract bid”, the SEC said.
The statement from the US agency highlighted the cost of supplies, including steel. Despite this, the company recorded a project gross margin of $23.5mn, “despite significant changes in circumstances for the Penguins Project, most notably the subcontract price with the fabrication subcontractor”.
Restating earnings
The company failed to account for problems on the projects under US generally accepted accounting principles (GAAP). As a result, it failed to report the losses on the projects.
As a result of this, Fluor materially overstated its net earnings by up to 37% in 2016 to early 2019. The delayed loss on the second project caused Fluor to overstate earnings in the second quarter of 2018 by 22%.
The settlement named CFO Bradley Scott, former chief accounting office Robin Chopra, a former business president James Brittain, a former business CFO Jon Eric Best and a former business senior vice president Kent Smith.
The officials paid penalties ranging from $15,000 to $25,000.
Brittain was the president of Fluor’s energy and chemicals segment. The SEC said the executive was a “cause of Fluor’s failure” to accurately report on costs at the Penguins project. The agency ordered him to pay $25,000 for his inaccurate reporting.
“Dependable estimates and the internal accounting controls that facilitate them are the backbone of percentage of completion accounting and are critical to the accuracy of the financial statements that investors rely on,” said Carolyn Welshhans, associate director in the SEC’s division of enforcement.
“We will continue to hold companies and individuals accountable for serious controls failures and resulting recordkeeping and reporting violations.”
Bringing closure
Fluor said the two projects were “now largely completed and involved historical transactions that the Company restated in September 2020”.
“The SEC investigation concerned accounting errors on legacy risk projects and associated internal controls weaknesses”, Fluor chairman and CEO David Constable said.
“Since that time, Fluor now has a refreshed Board and a new management team that is driving a balanced risk profile and healthy backlog. Bringing closure to the SEC investigation is in the best interests of our key stakeholders, including our shareholders.”
China’s Offshore Oil Engineering Company (COOEC) completed construction of the cylindrical FPSO in November 2022. Shell has had to delay first oil from the project, its first manned vessel in the UK for 30 years, repeatedly.
In July, Shell CEO Wael Sawan said he expected the FPSO to leave Norway in 2024.
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