The Commission's action against PACCAR Inc, a commercial
truck manufacturer, emphasizes the importance of good internal accounting
controls. SEC v. PACCAR Inc., Civil Action No. 2;13-cv-00953 (W.D. Wash.
Filed June 3, 2013). The case centers on three separate errors in the financial
reporting of the company. Each traces to deficiencies in the internal
accounting controls of the company.
The errors occurred in the period 2008 through the third
quarter of 2012. During that period the Fortune 200 manufacturer and
distributor of trucks and related aftermarket parts sold under the nameplates
Kenworth, Peterbilt and DAF, reported two segments in its Commision filings.
One was for trucks and aftermarket part sales and the other for financial
services. Errors occurred in each segment.
Reportable segment: In
its Form 10-K for the period ended December 31, 2009 PACCAR did not separately
report income before taxes from truck sales and aftermarket part sales. GAAP,
and the applicable Commission rules, require an issuer to report select
information about reportable segments. A reportable segment is one which
engages in business activities from which it may earn revenues and incur
expenses, has operating results regularly reviewed by the chief operating
decision maker and has discrete financial information available. The point is
to permit investors to view the entity through the eyes of management.
Here PACCAR parts maintained separate internal financial
statements which were regularly reviewed by its chief operating decision maker.
Company executives viewed the business as a segment, a point reflected by
internal strategic planning materials which divided the overall business into
three segments - trucks, parts and financial services. By failing to include
segment information in the Form 10-K, the company violated GAAP - investors
could not see the results available to company executives. Those showed that
the reported pre-tax income of $68 million resulted from the combination,
before certain shares expenses, of a $474 million loss from the truck segment
and a $542 million profit from the part sales.
Impaired receivables: PACCAR
and its related finance company, defendant PACCAR Financial Corporation,
understated impaired receivables and the associated specific reserve in the
financial statement notes to the 2009 Form10-K, according to the complaint. In
that filing the company failed to disclose that all of its non-accrual
receivable as of year end were impaired. This resulted in a 24% understatement.
It also failed to include all troubled debt restructurings in its impaired
receivables disclosure. This resulted in a 39% understatement of impaired
receivables. Likewise, the company failed to disclose the impairment of leases
to its two largest past due customers, despite concerns of executives who were
monitoring them. This resulted in a 64% understatement from what was actually
reported for impaired receivables.
Retail loans and direct financing leases: The
company overstated the amount of (a) retail loans and direct financing leases
originated and (b) collections on retail loans and direct financing leases in
its consolidated Statement of Cash Flows for the quarters ended June 30, 2009
and September 30, 2009. The amounts were equal and offsetting so there was no
change to the amount of net cash provided by investing activities reported. The
company identified these errors during the first quarter of 2010 and
acknowledged them, along with the others, in comment letters in responses to
the Commission staff.
While the complaint states that the errors resulted from
inadequate internal controls and policies and procedures, it also acknowledges
that the company has implemented remedial measures. It alleges violations of
Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B).
The company resolved the action, consenting to the entry
of a permanent injunction prohibiting future violations of the Sections cited
in the complaint. It also agreed to pay a civil monetary penalty of $225,000.
The settlement takes into account the remedial actions of the company.
ABA Seminar: Fifth
Annual FCPA Update: Protecting Your Business in the Future: Lessons from the
New DOJ-SEC FCPA Guide, June 19, 2013 from 1:00 -2:30 p.m. EST. The discussion
will focus on building effective compliance systems and conducting M&A due
diligence. Co-moderators: Thomas Gorman and Frank Razzano. Panel: John Buretta,
Principal Deputy to the Assistant AG, DOJ; Charles Cain, Assistant Director,
FCPA Unit, SEC Division of Enforcement; Catherine Razzano, Assistant General
Counsel, General Dynamics Corporation; Steve Siegal, Senior Counsel, Northrop
Grumman Corporation; Ryan Ong, President, U.S. China Business Counsel. Live in
Washington, D.C at 600 14th St. N.W., Penthouse (no charge for ASECA
members attending live in Washington who pre-register by sending an e-mail to
firstname.lastname@example.org). Webcast nationally by the ABA and available in other
Dorsey & Whitney offices. For further information please click here.
For more commentary on developing securities
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