SEC Charges KBR for Inflating Key Performance Metric

Washington, DC--(Newsfile Corp. - July 2, 2018) - The Securities and Exchange Commission today charged global engineering and construction company KBR Inc. for inflating a key performance metric known as work in backlog. KBR agreed to pay a $2.5 million penalty to settle the SEC’s charges.

According to the Commission’s order, KBR’s public disclosures of its work in “backlog” were important to investors because the metric represented the amount of revenue that KBR expected to receive in the future from firm orders under awarded contracts. 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, even though KBR had not received -- and the counterparty was not obligated to provide -- any orders under the contract. By including the full $459 million in its disclosures, KBR violated its internal reporting policies and misled investors by overstating its work in backlog. KBR continued to overstate its backlog for almost two years. The Commission also found that KBR failed to make accurate and reliable estimates of the costs to complete the seven Canadian contracts -- cost estimates the company used to improperly recognize revenue on the contracts. KBR’s internal accounting controls were also not properly designed to identify or prevent errors in the estimates of costs to complete. As a result, KBR restated earnings in its consolidated financial statements for the fiscal year ended December 31, 2013 and its unaudited consolidated financial statements for the third quarter of 2013.  The restated earnings resulted in charges of $156 million.

“Non-financial statement metrics such as backlog can provide additional insight to investors regarding a company’s performance,” said Shamoil T. Shipchandler, Director of the SEC’s Fort Worth Regional Office. “To the extent that companies use these kinds of metrics, they must ensure they are accurate and not misleading.”

Without admitting or denying the allegations, KBR consented to the SEC’s order finding of books and records, internal accounting controls, financial reporting, and other securities law violations, and agreed to pay a $2.5 million penalty.

The SEC’s investigation was conducted by Keefe Bernstein, Julia Huseman, and Carol Stumbaugh of the Fort Worth Regional Office. The case was supervised by Barbara Gunn and Eric Werner. The SEC appreciates the assistance of the Alberta Securities Commission.