Engineering and construction company KBR Inc. has agreed to pay a $2.5 million penalty to settle SEC charges that it inflated a key performance metric known as work in backlog.
KBR’s work in backlog is an important metric of its business. It is mentioned in the company’s press releases, and analysts cite it when evaluating the company’s performance. According to the company’s SEC filings, backlog represents the dollar amount of revenue it expects to realize in the future as a result of performing work on contracts awarded.
“Non-financial statement metrics such as backlog can provide additional insight to investors regarding a company’s performance,” Shamoil Shipchandler, director of the SEC’s Fort Worth Regional Office, said in a release. “To the extent that companies use these kinds of metrics, they must ensure they are accurate and not misleading.”
The SEC found that in the second quarter of 2012, KBR included $459 million in its publicly disclosed backlog for one of seven contracts it entered into to complete pipe fabrication and modular assembly contracts in Canada. However, KBR had not received any firm orders under the contract, and therefore violated its internal reporting policies, and misled investors by overstating its work in backlog by including the $459 million in its disclosures.
According to the SEC’s charges, the inaccurate backlog recording remained in place during the next six quarters, even after it became clear that KBR was receiving far fewer work authorizations under the contract than expected.
Following an investigation led by its audit committee, KBR concluded that a material weakness in internal control over financial reporting existed in the Canadian pipe fabrication and modular assembly business, which it blamed on insufficiently trained personnel.
The committee also determined that there was an ineffective control environment, because the culture at the Canadian pipe fabrication and modular assembly business “facilitated delayed identification and communication of project concerns and the proper preparation of complete and accurate estimates,” said the SEC’s order.
KBR neither admitted nor denied the allegations, but consented to entry of the SEC’s order.