Learning from Fluor Corporation's $14.5 million accounting mistake

Fluor Corporation, a Texas-based global engineering and construction firm, recently agreed to a $14.5 million settlement with the US Securities and Exchange Commission (SEC).

The settlement arose from improper accounting practices related to two large-scale, fixed-price construction projects.

While the company neither admits nor denies the SEC’s findings, the case serves as a cautionary tale for CFOs in large corporations.

The accounting error

According to the SEC, Fluor relied on overly optimistic cost and timing estimates for two construction projects. This led to cost overruns that worsened over time.

The company failed to maintain adequate internal controls, resulting in the material misstatement of its financial statements for several reporting periods.

Fluor’s accounting errors caused the company to overstate its net earnings by as much as 37% from fiscal year 2016 through the first quarter of 2019.

The delayed loss recognition on the second project led to a 22% overstatement in the second quarter of 2018.

The importance of internal controls

For CFOs overseeing large projects, this case underscores the importance of robust internal controls. Fluor’s failure to maintain these controls led to significant financial misstatements.

CFOs must ensure that their accounting teams are not just compliant with US generally accepted accounting principles (GAAP), but also that they are conservative in their estimates to avoid any potential overstatements.

One of the key takeaways is the necessity of maintaining a rigorous system of checks and balances within the accounting department.

Regular internal and external audits can serve as the first line of defence, helping to identify any discrepancies or areas of concern before they escalate into significant issues. But it’s not just about audits. Education plays a crucial role as well.

Ensuring a business’s accounting and finance teams are up-to-date with the latest accounting principles and regulations is vital. Continuous training sessions can equip them with the knowledge and skills needed to prevent inadvertent errors that could lead to financial misstatements.

Technology can also be a CFO’s best friend in these situations. Modern accounting software comes equipped with features that can flag inconsistencies or errors, providing an additional layer of oversight that can prove invaluable.

Senior management should also be actively involved in the review of significant accounting judgments and estimates. This collaborative approach ensures that multiple eyes are scrutinizing the financials, thereby reducing the risk of oversight.

And when in doubt, CFOs should consider consulting external experts. Whether it is accounting consultants or legal advisors, a third-party perspective can offer invaluable insights into whether an organisation’s accounting practices are compliant.

The role of optimism in financial forecasting

Optimism can be a double-edged sword. While it can drive a company to achieve ambitious goals, it can also lead to unrealistic financial projections.

In Fluor’s case, overly optimistic cost and timing estimates were a significant factor in the accounting errors. CFOs must strike a balance between optimism and realism in their financial forecasting.

To do this, it is essential for CFOs to ground their forecasts in data. While it is natural to aim for the best-case scenario, your projections should be rooted in historical performance and current market conditions.

This ensures optimism is supported by tangible evidence, reducing the risk of significant discrepancies down the line.

Secondly, involve multiple departments in the forecasting process. Different perspectives can provide a more rounded view of potential risks and opportunities, helping to counterbalance any overly optimistic or pessimistic views.

It is now common practice for CFOs to implement a range of scenarios into their accounting forecasting model. Instead of relying solely on a single ‘most likely’ scenario, include best-case and worst-case scenarios as well.

This approach not only prepares a business for various outcomes but also allows CFOs to gauge the level of optimism already baked into the forecasts.

Stress tests can also support this approach and serve as a ‘reality check’ for forecasts. By simulating different adverse conditions, CFOs can identify vulnerabilities and make necessary adjustments, ensuring that their projections are both optimistic and realistic.

The cost of non-compliance

Fluor’s settlement with the SEC included a civil penalty of $14.5 million. This serves as a stark reminder of the financial repercussions that can arise from accounting errors.

For CFOs, it’s not just about getting the numbers right; it’s about understanding the potential legal and financial risks associated with non-compliance.

Fluor has taken remedial steps, including restating its financial statements for fiscal years 2016 through 2018.

The company has also identified material weaknesses in its internal control over financial reporting.

David Constable, chairman and CEO of Fluor, stated that the company now has a “refreshed Board and a new management team that is driving a balanced risk profile and healthy backlog.”

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Takeaways for CFOs

• Robust Internal Controls: Ensure that your internal controls are not just compliant but are also robust enough to catch errors before they escalate.
• Balanced Financial Forecasting: Be realistic in your financial projections. Over-optimism can lead to significant errors.
• Legal and Financial Risks: Understand the potential repercussions of accounting errors, which can go beyond financial losses to include legal penalties.
• Continuous Improvement: Always be prepared to take remedial steps and improve your financial reporting processes.
• Fluor’s $14.5 million mistake serves as a lesson for CFOs in large corporations. By understanding the errors and taking proactive steps, CFOs can mitigate risks and steer their companies toward financial stability.

Read The CFO’s latest blueprint on ensuring data integrity and accuracy in FP&A, here. 

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