The Securities and Exchange Commission (SEC) announced that United Parcel Service Inc. (NYSE:UPS) has agreed to pay a $45 million penalty. This settlement resolves charges that the company materially misrepresented its earnings by failing to adhere to generally accepted accounting principles (GAAP) when valuing its UPS Freight business unit.
The SEC's order reveals that in 2019, UPS determined its UPS Freight unit, focused on less-than-truckload shipments, would likely sell for no more than approximately $650 million. However, UPS eschewed this internal valuation, instead relying on an inflated $2 billion valuation provided by an outside consultant who was not given necessary information to make a fair assessment. Consequently, UPS did not record a goodwill impairment that year, which would have significantly lowered its reported earnings.
In a similar vein, during 2020, UPS entered into a tentative agreement to sell the Freight unit for $800 million, a figure that was expected to decrease with future adjustments. Despite this and its previous analysis, UPS once again used the consultant's overestimated valuation to justify not impairing the goodwill of the business, resulting in a material overstatement of earnings and other financial metrics.
Melissa Hodgman, Associate Director at the SEC, emphasized the importance of accurate goodwill valuations for investors, noting that UPS had repeatedly failed to meet these standards by disregarding its own sale price estimates in favor of unreliable third-party valuations.
According to the SEC's order, UPS violated multiple sections of the Securities Act and the Exchange Act, including provisions related to reporting, book and records, internal accounting controls, and disclosure controls. While UPS has not admitted or denied the findings, the company has consented to cease and desist from future violations, implement training for certain personnel, and engage an independent compliance consultant to review and recommend improvements to the company's valuation and disclosure practices.
The SEC's investigation remains ongoing and is being led by Joseph Zambuto, Jr. under the supervision of Assistant Director Rami Sibay.
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