United Parcel Service Inc. has agreed to pay a $45 million civil penalty over charges that it improperly valued a business unit, the Securities and Exchange Commision announced.
The SEC alleged that UPS misrepresented its earnings because it failed to follow generally accepted accounting principles (GAAP) in valuing one of its worst performing businesses, its freight unit.
The SEC’s order said that UPS determined in 2019 that UPS Freight, a business unit that transported less-than-truckload shipments, was likely to sell for no more than about $650 million.
GAAP required UPS to use the price it would receive to sell Freight in calculating whether it needed to write-down the value of the goodwill it had assigned to the business unit on its balance sheet. UPS’s own analysis indicated that nearly $500 million of goodwill it had associated with Freight was impaired.
Goodwill impairment is a term used in accounting to recognize that the face value of an asset on paper exceeds its fair value.
But instead of using its own analysis, the SEC said that UPS relied on an outside consultant’s valuation of the freight division, without giving the consultant information necessary to conduct a fair valuation of the business. The commission said that the consultant used assumptions approved by UPS and then estimated that the freight unit was worth about $2 billion, three times as much as UPS had determined.
On that basis, UPS did not record a goodwill impairment in 2019. Had UPS properly valued Freight, its earnings and other reported items would have been materially lower.
The SEC’s order also alleges that in 2020 UPS entered into a non-binding term sheet to sell the freight unit for $800 million with adjustments to be made later that were likely to reduce the final price.
Despite its own analysis and its entry into this term sheet, UPS again relied on a consultant’s valuation of the unit in 2020 to support not impairing the business’s goodwill. UPS also did not inform the consultant of the term sheet, according to the SEC.
Just as in 2019, the commission said that had UPS properly valued the freight division and impaired goodwill, its earnings and other reported items would have been materially lower.
.”Goodwill balances provide investors with valuable insight into whether companies are successfully operating the businesses they own,” said Melissa Hodgman, Associate Director. “Therefore, it is essential for companies to prepare reliable fair value estimates and impair goodwill when required. UPS fell short of these obligations, repeatedly ignoring its own well-founded sale price estimates for Freight in favor of unreliable third-party valuations.”
UPS was found to have violated Sections 17(a)(2) and (3) of the Securities Act, the reporting, book and records, internal accounting controls, and disclosure controls provisions of the Exchange Act, and various related rules. The company did not admit or deny the SEC’s findings, but agreed to pay the civil penalty, to cease and desist from further violations of these provisions, adopt training requirements for certain officers, directors, and employees, and retain an independent compliance consultant to review and make recommendations about the company’s fair value estimates and disclosure obligations.
The attorneys at Lewitas Hyman have decades of experience dealing with securities fraud cases and have a deep understanding of how capital markets and financial service firms are intended to work to protect investors. If you think your financial professional or firm engaged in misconduct that caused you investment losses, contact Lewitas Hyman at (888) 655-6002 or through our online contact form for a no-cost evaluation of your matter.
