The SEC has announced today that United Parcel Service Inc. (UPS) has settled charges for misleading investors by failing to adhere to generally accepted accounting principles (GAAP) in valuing one of its underperforming business units, UPS Freight.
Key Details of the Misrepresentation
Inflated Valuation of UPS Freight in 2019
- UPS Freight, a business unit specializing in less-than-truckload shipments, was determined by UPS in 2019 to be worth no more than $650 million.
- Despite this internal estimate, UPS used an external consultant’s valuation that placed Freight’s value at $2 billion—three times the estimated sale price.
- This decision allowed UPS to avoid recording a goodwill impairment of nearly $500 million, which would have materially impacted its earnings.
Continued GAAP Violations in 2020
- In 2020, UPS entered into a non-binding agreement to sell Freight for $800 million, with adjustments expected to reduce the final price.
- Instead of reflecting this transaction in its financial reports, UPS again relied on the consultant’s valuation without disclosing the sale agreement.
- The assumptions provided to the consultant were deemed unrealistic and inconsistent with what a potential buyer would consider.
SEC’s Findings and Violations
The SEC’s investigation found that UPS violated the following:
- Sections 17(a)(2) and (3) of the Securities Act.
- Reporting, book and records, and internal accounting controls provisions of the Exchange Act.
UPS’s actions resulted in misleading financial statements, overstating earnings, and failing to follow disclosure requirements.
Statement from the SEC
Melissa Hodgman, Associate Director of the SEC’s Enforcement Division, highlighted the significance of goodwill impairments:
“Goodwill balances provide investors with valuable insight into whether companies are successfully operating the businesses they own. 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 Settlement Terms
UPS agreed to the following terms without admitting or denying the findings:
- Cease and desist from future violations.
- Implement training programs for relevant officers, directors, and employees.
- Retain an independent compliance consultant to review valuation practices and disclosure obligations.
Conclusion
The SEC’s actions underline the importance of accurate reporting and adherence to GAAP standards. By prioritizing transparency and compliance, companies can maintain investor trust and avoid significant legal penalties.
