Truck manufacturer Navistar International has settled with the Securities and Exchange over accounting irregularities, and several of its executives and former executives have agreed to pay stiff penalties to settle fraud charges.
The SEC accused Navistar of overstating its pre-tax income between 2001 and 2005 by approximately $137 million as the result of various instances of misconduct. Fraud by certain individuals at a Wisconsin foundry and in connection with certain vendor rebates and vendor tooling transactions accounted for approximately $58 million of that total. The remaining approximately $79 million resulted from improper accounting for certain warranty reserves and deferred expenses.
On Thursday, the SEC issued a cease-and-desist order against the company and its CEO, Daniel C. Ustian, former CFO Robert C. Lannert, along with five other executives: Thomas M. Akers, Jr., James W. McIntosh, James J. Stanaway, Ernest A. Stinsa and Michael J. Schultz. Each consented to the issuance of the order without admitting or denying the SECs findings as part of a global settlement.
The SEC said that Navistar had numerous deficiencies throughout its system of internal controls during the period, including 15 material weaknesses during 2005-06 that were attributable, in part, to the company's failure to dedicate sufficient resources to those controls.
From 2001 through 2004, Navistar improperly booked as many as 30 vendor rebates and related receivables from its suppliers. While these rebates and receivables took different forms including volume-based rebates and so-called "signing bonuses" for Navistar's award of new business all were improperly booked as income in their entirety upfront, even though, in whole or in part, they were earned in future periods. The company's eventual restatement of these rebates and receivables totaled $9.7 million of pre-tax income in 2004, representing 27.7 percent of that year's restated loss before income taxes.
In 2003, Navistar improperly accounted for certain tooling buyback agreements by recapturing and booking as income the previously-paid amortization on those agreements and then improperly deferring the related depreciation costs. The company continued to use this improper accounting treatment in 2004 to record 60 days of amortization from the buyback agreements as income, despite employees' warnings that doing so would be inconsistent with the outside auditor's guidance.
From 2001 to 2005, Schultz, the Waukesha, Wis., plant controller, engaged in various fraudulent accounting practices that collectively caused income during that period to be overstated by a total of approximately $38 million, according to the SEC. Beginning in fiscal year 1999, Navistar inappropriately included various "below-the-line" items in the company's warranty reserve calculation, which caused the warranty reserve expense to be understated by $17 million in fiscal year 2002 and by $18.5 million in fiscal year 2003. The $18.5 million total represented 5.9 percent of the restated loss before income tax for that year.
Navistar, through its senior accounting staff, also deferred certain start-up costs from the fourth quarter of 2001 through the fourth quarter of 2002 that were not in compliance with GAAP. Specifically, the truck maker deferred $4.3 million in the fourth quarter of fiscal year 2001, $12.8 million in the first quarter of fiscal year 2002, and $13.3 million in each of the second and third quarters of fiscal year 2002.
Navistar, from the first quarter of fiscal year 2004 through the third quarter of 2005, failed to report its Parts group as a segment in its publicly filed financial statements and notes, and instead allocated the Parts group's results between its Truck and Engine divisions' results.
This resulted in investors not being able to view the Parts group in the same manner as senior management and the board. The company's Forms 10-K for at least fiscal year 2004 and Forms 10-Q for 2004 and the first three quarters of 2005 failed to provide complete segment information required by GAAP and SEC rules.
Undere the settlement with the SEC, Ustian agreed to tender $1.32 million worth of shares he owned of Navistar stock back to the company, and Lannert consented to pay $1,049,503 to the company. Those dollar amounts reflect monetary bonuses that each received during the restatement period.
Akers, McIntosh, Stanaway, Stinsa and Schultz each agreed to pay civil penalties, with Akers paying $100,000, McIntosh $150,000, Stanaway $50,000, and Stinsa $25,000. A civil penalty was not imposed against Schultz because of his demonstrated inability to pay. They all consented to the filing of the SEC complaint without admitting or denying its allegations.
The SEC also issued a separate settled order concerning Navistar's former controller, Mark T. Schwetschenau, directing him to cease and desist from causing any violations and any future violations of the securities laws, and denying him the privilege of appearing or practicing before the SEC with the right to request reinstatement after one year.
The SEC filed a parallel civil action in the United States District Court for the Northern District of Illinois against Schwetschenau in which he consented to pay $37,500 in civil penalties. Schwetschenau neither admitted nor denied the SECs findings and allegations.
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