Dive Brief:

• The Securities and Exchange Commission charged three executives at Austal USA, a shipbuilder for the U.S. Navy, with engineering a multi-million dollar accounting fraud by understating the cost of producing several vessels under the widely criticized Littoral Combat Ship program.
• The fraudulent revenue recognition scheme enabled Austal Limited, the company’s Australia-based parent company, to meet or exceed analyst expectations, the SEC said in a statement. 
• Craig Perciavalle, Austal USA’s former president, Joseph Runkel, the company’s current director of financial analysis, and William Adams, former director of the LCS program, allegedly “knew that Austal USA’s shipbuilding costs were rising and higher than planned, but they directed others to arbitrarily lower the cost estimates to meet Austal USA’s revenue budget and revenue projections,” the SEC said.

Dive Insight:

The three defendants while employed at Mobile, Ala.-based Austal USA, allegedly reduced an accounting metric known as “estimate at completion” pertaining to several LCS vessels, thereby overstating Austal Ltd.’s earnings in its public financial statements, the Department of Justice said.

The defendants manipulated the EAC figures by allegedly citing so-called program challenges, ostensibly cost savings goals that were fraudulent “plug” numbers aimed at hiding rising costs, the DOJ said.

“The defendants allegedly did this, among other reasons, to maintain and increase the share price of Austal Ltd.’s stock,” the DOJ said. “When the higher costs were eventually disclosed to the market, the stock price was significantly negatively impacted and Austal Ltd. wrote down over $100 million.”

The executives allegedly engaged in deception from at least Jan. 2013 through at least July 2016 and attempted to conceal the fraud by lying to auditors, the SEC said in its complaint.

During the period of the fraud, Austal’s share price rose 173% from Feb. 2014 until late Nov. 2015, the SEC said.

“If the defendants had not fraudulently manipulated the cost estimates, Austal Ltd. would have missed, by wide margins, analyst consensus estimates for EBIT,” SEC said.

The executives, if convicted, face a maximum penalty of 30 years in prison for conspiracy to commit wire fraud and wire fraud affecting a financial institution, the DOJ said.

For years the Pentagon’s program to build 35 LCS vessels has faced operational headwinds while running over budget and behind schedule.

The LCS “fleet has not demonstrated the operational capabilities it needs to perform its mission,” the Government Accountability Office said in a Feb. 2022 report.

“Operational testing has found several significant challenges, including the ship’s ability to defend itself if attacked and failure rates of mission-essential equipment,” the GAO said.

The Navy budgeted more than $60 billion for the program but has proposed early retirements which would trim the force to 32 vessels, according to a March 27 report by the Congressional Research Service.