Fraud does not take a holiday when it comes to stealing from the government. As a business ethics keynote speaker, business ethics consultant and book author, I know that concepts such as patriotism are largely brushed aside to the fraudster who may view the US Navy as a large piggybank.
Faking the Stock Price
In this fraud, the company did not substitute cheap parts for expensive or bring in unqualified labor, Austral USA, the parent company, ran an accounting fraud scheme. They misrepresented millions of dollars in order to artificially inflate their stock price. The company is based in Mobile, Alabama, and they conducted fraud in the approximate period from 2013 to 2016.
The three main players who conducted the fraud were the former president of the firm, the former director of financial analysis and the former director of the firm’s Littoral Combat Ships program.
The three executives sought “to artificially reduce cost estimates for Navy shipbuilding projects by tens of millions of dollars.”
Why would they do this?
The executives were aware that their projected costs were increasing. Hence, the profit margins would be lowered. The ethical action to take would have been to disclose this situation to the financial community, shareholders and to the US Navy itself. Instead, the president of the firm and the other key executives directed their subordinates to lower the cost estimates to meet the initial projections.
According to the Department of Justice:
“Investigators said they suppressed an accounting metric known as ‘estimate at completion’ in relation to several Navy littoral combat ships (LCS), which resulted in a false overstatement of the company’s reported earnings in public financial statements.”
It makes sense that if they intentionally decreased their costs and lied to everyone involved, the stock price would rise and they could benefit due to the number of shares that they held.
When the actual costs were finally disclosed, as we might imagine, the stock price dropped. Presumably, before that occurred, the executives cashed out of the stock with a significant amount of money.
On the other hand, the Australian-based parent company had no choice but to write down more than $100 million in unexpected costs. Austal USA is a wholly-owned subsidiary of Austal Limited.
Perhaps the leadership of the US division felt this would be a case of out-of-mind, and that they could hide the major elements of the fraud.
Said the company spokesperson:
“[Austal Limited] and Austal USA have been cooperating with the DoJ and SEC in their investigations and will continue to do so until these matters are fully resolved…Austal USA has invested significant time and resources to strengthen its compliance program since the investigations began. While significant changes have been implemented, a review of its current compliance programs is continuing to ensure that it maintains a significantly enhanced compliance program and conducts business with the highest level of integrity.”
Consequences
The executives were charged with “conspiracy to commit wire fraud and wire fraud affecting a financial institution, five counts of wire fraud and two counts of wire fraud affecting a financial institution.
They could each face decades in jail.
In reviewing a fraud of this magnitude, it is wise to ask what could have been done to prevent it and how could it be avoided again in the future? Clearly, had there been a rigorous system of checks and balances in place and greater transparency, this fraud might have been prevented.
It appears as though there was a disconnect between the parent company and its subsidiary. “Trust” is a nebulous concept. Given the enormity of the fraud, to have not had a more rigorous reporting structure in place was a major failure. Obviously, compliance and corporate governance were flawed. The scandal need not have occurred if the internal auditing function had been more rigorous in its approach.
Could this occur again? It depends upon the commitment to ethical behavior. Perhaps to the executives, “no one would get hurt.” There was no product failure, per se, only a failure of the accounting and compliance functions.
In the greed of the principal fraudsters to make money, thousands of shareholders were potentially hurt, perhaps to the tune of tens of millions of dollars. There was nothing harmless about this crime. Good people paid the price for unethical behaviors.
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