Key Takeaways

  • The U.S. Securities and Exchange Commission (SEC) charged naval shipbuilder Austal with a fraudulent revenue recognition scheme and imposed a $24 million civil penalty.
  • In its complaint, the SEC alleged that Austal USA, based in Mobile, Alabama, and its Australian parent company understated estimated completion costs on naval shipbuilding projects by tens of millions of dollars to meet revenue and budget targets, despite knowing actual construction costs had exceeded plans.
  • Jason Burt, Director of the SEC's Denver Office, said: "The settlement terms make clear that when companies manipulate financial results to avoid falling short of analyst expectations, and such conduct harms U.S. investors, the SEC will hold them accountable, no matter where they are located."

In-Depth Analysis

The SEC and the Department of Justice alleged that from at least January 2013 to July 2016, Austal USA misled shareholders, auditors, and the investing public by understating the "Estimate at Completion" (EAC) accounting metric, which is used to measure cost expectations for the Littoral Combat Ship (LCS) construction program.

The DOJ stated that to boost the stock price of parent company Austal Limited, Austal USA manipulated EAC data using "project challenges" or false "fill" figures to conceal rising costs. The scheme falsely inflated the profitability of Austal USA's shipbuilding projects and the earnings reported by Austal Limited.

The SEC noted that during the fraud period, Austal's stock rose 173% from February 2014 to late November 2015. When the higher costs eventually came to light, Austal Limited wrote down more than $100 million, and its stock price subsequently fell sharply.

Last year, the SEC charged three senior executives of Austal USA, alleging they orchestrated this multi-million-dollar accounting fraud. The DOJ stated that these executives are currently awaiting trial.

Austal describes itself as "the only foreign contractor to design, build, and maintain ships for the U.S. Navy." The company was a prime contractor for the Pentagon's Littoral Combat Ship program, which, according to a May Government Accountability Office (GAO) report, has long suffered from "performance deficiencies, shortfalls, and cost growth" issues.

A February 2022 GAO report stated: "Operational testing identified several significant challenges, including the ships' self-defense capabilities when under attack and failure rates of critical mission equipment." The Navy has budgeted over $60 billion for the LCS program, but according to a March 2023 Congressional Research Service (CRS) report, the Navy proposed retiring some ships early, reducing the fleet from 35 to 32 vessels.

In May 2023, the Navy announced it awarded Austal USA a $113.9 million contract to build the TAGOS-25, the newest design of anti-submarine surveillance ship. The CRS reported this month that in May of this year, the Navy awarded the company a $516 million contract modification for the ship's construction.

The CRS noted that in its fiscal 2024 and 2025 budget requests, the Navy estimated the cost of the first surveillance ship at $789.6 million, 81.8% higher than previous estimates. In its fiscal 2024 budget, the Navy attributed the cost increase to "multiple factors affecting ship prices, including direct material inflation, supply chain challenges, and increased non-recurring engineering costs," while the CRS also cautioned about "the risk of further cost growth for the first ship."