CRIMINAL CAPITALI$M

Austal to Pay $24M to Settle Old Accounting Fraud Charges with US DOJ/SEC

IN ORDER TO BID ON UPCOMING NAVY SHIP BUILDING CONTRACTS

Charges of accounting irregularities stemmed from 2013 to 2016 on the LCS program (USN file photo)

Published Aug 27, 2024 1:24 PM by The Maritime Executive

 

 

Fifteen months after three former executives of Austal US were indicted in an accounting scandal, the parent company Austal Ltd. has reached terms of a settlement that calls for a US$24 million penalty and compliance steps. The settlement which still requires court acceptance is the result of an investigation that focused on accounting issues between 2013 and 2016 and resulted in the president and two other executives being ousted at the US division.

Austal US will enter into a plea agreement with the U.S. Department of Justice to resolve the criminal charges pending against the U.S. company related to the account issues. The U.S. company has also agreed to certain compliance and compliance reporting obligations as part of the plea agreement. Austal will engage an independent monitor for three years to assess and monitor compliance with the DOJ agreement. In 2023, a month after the indictments were revealed, Austal US also hired a former federal prosecutor to serve as its chief compliance officer.

In addition to the agreement with DOJ, Austal and Austal USA have settled with the U.S. Securities Exchange Commission which alleged the accounting irregularities misled investors. The $24 million penalty, which will be paid in installments over 12 months following court approval, will go to the SEC to be administered to shareholders. Austal reports in total it will book a US$32 million provision for the fine/resolution, some legal costs, and expected compliance costs. 

The company reports it is also in “advanced discussions” with the U.S. Navy and is seeking to enter into an Administrative Agreement. This would set out “remedial measures,” the company said, including commitments to compliance and future reporting as well as the retention of an independent compliance monitor. All the steps are required for the company to maintain its standing as a “responsible contractor,” a requirement of eligibility to undertake contracts for the U.S. Navy and the U.S. Coast Guard.

The company’s recently retired chairman John Rothwell points out they have a larger orderbook of work with the US Government and said “We need to concentrate on the future – not the past.”

At issue, were accusations that the U.S. company manipulated an accounting metric known as “estimate at completion” for work on the Littoral Combat Ship (LCS) program between 2013 and 2016 to inflate reported earnings and meet or exceed analyst estimates. The information was passed to and incorporated into the financial reports of Austal Ltd. Austal in 2016 reported it had underestimated the cost needed to build the LCS early in the program, forcing it to write down the value of its work in progress and caused the corporation to record an unexpected full-year financial loss.

The SEC in its filing called it a "fraudulent revenue recognition scheme." Their complaint alleges that Austal USA knew that its shipbuilding costs were rising and higher than planned, but arbitrarily lowered the cost estimates to meet Austal USA’s revenue budget and projections. 

“Settling this action is the best outcome for Austal,” said Austal Non-Executive Director and immediate past Chairman John Rothwell. “Upon learning of this issue, Austal conducted its own independent investigation. The responsible individuals are no longer with the company, and we have made numerous governance changes to prevent similar issues from occurring again.”

Austal USA President Craig Perciavalle resigned in 2021 following the completion of the internal inquiry and news of the investigation by the U.S. authorities. The director of Austal's Independence-class Littoral Combat Ship (LCS) program, William Adams, and its director of financial analysis Joseph Runkel, also resigned. All three were part of the 2023 indictment that charged wire fraud, wire fraud affecting a financial institution, and related conspiracy charges in connection with the accounting scandal.

Once the settlement is approved, it will end all the investigations into the accounting issues that led to the 2016 write-down and financial losses. Separately, in September 2022, Austal resolved an investigation by the Australian Securities and Investment Commission. The company paid A$650,000 (US$440,000) to the Australian authorities. The statute of limitations has expired in Australia for any future civil litigation.