SEC charges former L3 executives with accounting missteps

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The Securities and Exchange Commission has charged two former executives at the government contractor L3 Technologies with accounting-related violations.

The SEC’s Enforcement Division alleged that David Pruitt, a former vice president of finance at L3’s Army Sustainment Division, bypassed the company’s internal accounting controls, causing L3 to improperly recognize $17.9 million in revenue from a contract it had with the army by creating invoices that weren’t actually delivered at the time the revenue was recorded. The additional revenue allegedly allowed employees in the division to just barely satisfy an internal target at the company for management incentive bonus payments.

The SEC also alleged that Pruitt, who is a CPA, took steps on a number of occasions to hide the fact that the invoices hadn’t been delivered from L3’s corporate office and outside auditor.

A business manager at L3 emailed concerns about the procedure to a contract manager in December 2013, according to the administrative order issued Friday by the SEC. “It appears as thought [sic] the Revenue Recovery items are being handled outside of the L3 corporate policy,” he wrote. “I cannot quote the policy, however, I know that a revenue accrual the size of the one that it would take to account for the Revenue Recovery would require Corporate approval. To avoid that Corporate approval, we have been directed to cut invoices through the billing system, but not send the invoices to the government. I believe that is being done to avoid Corporate policy and try to ‘hide’ this from the auditors. I could be mistaken, but this doesn’t pass the smell test.”

The email was originally reported on the blog Going Concern.

Pruitt’s attorney, John Carney of Baker Hostetler, disputed the SEC’s allegations. “It is highly unusual for the SEC to bring a revenue recognition case where there is no allegation of fraud and it is undisputed that the work was fully performed, the amounts were immaterial and the Company fully collected on the receivables at issue,” he said in an email to Accounting Today. “We are confident that Mr. Pruitt, a highly decorated career Army officer, will be fully vindicated at a hearing.”

The SEC has scheduled a public hearing before an administrative law judge, who will prepare an initial decision stating what, if any, remedial actions are appropriate in the case.

The SEC also issued a separate order Friday against another former L3 executive, Mark Wentlent, the former president of L3’s Army Sustainment Division, alleging he failed to follow up on red flags indicating Pruitt had caused the company to improperly recognize revenue. Wentlent consented to the SEC order without admitting or denying the findings, and is paying a $25,000 penalty. L3 has rescinded the bonus payment he received after the misconduct. His attorney did not respond to a request for comment.

“Executives must be held accountable when they’re actively involved in corporate wrongdoing or look the other way,” said Andrew M. Calamari, director of the SEC’s New York Regional Office, in a statement. “We allege that Pruitt circumvented critical accounting safeguards so improper revenue could be recorded to reach an internal target that enabled management to receive bonuses, and it was unreasonable for Wentlent to rely solely on Pruitt under the circumstances.”

In January, L3 paid a $1.6 million penalty to settle SEC charges against the company for the accounting failures.

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