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Three years after launching an investigation into the company's accounting practices, the regulator considers settlement options.
Stephen Taub, CFO.com | US
August 3, 2007
United Rentals Inc. says the staff of the Securities and Exchange Commission plans to take some sort of action against it following a probe of possible accounting irregularities.
According to the equipment-rental company, the SEC staff has indicated it will ask the commissioners to engage in settlement discussions with United to resolve an investigation begun three years ago. It also says the Department of Justice has requested information about matters related to the SEC inquiry.
The SEC initially launched a probe of the company in August 2004. A year later, United's board of directors formed a special committee to review the issues related to the SEC inquiry, including the restatement of financial statements filed for 2003 and 2002.
In August 2005, United fired president, CFO, chief acquisition officer, and secretary John Milne "for cause," because he was unwilling to respond to questions related to the SEC inquiry. In January 2006, United said it would remove three more financial executives — its corporate controller, principal accounting officer, and vice president of finance — from their positions after the special committee disclosed its findings. It stressed at the time that it did not find intentional wrongdoing on the part of the three individuals. The company also said at the time that it would fire two employees and that three others would receive written reprimands.
At the end of its investigation, the committee found that practices regarding sale-leaseback transactions and trade packages appeared to have been directed by the company's two former CFOs. Both of these individuals, who were no longer with the company, declined to cooperate with the committee's investigation, the company said in a statement. United did not identify any of the disciplined individuals by name.
The committee also disclosed irregularities with respect to some trade packages that involved undisclosed inducements, but it accepted the company's view that new disclosures, rather than a restatement, were appropriate for these transactions. The committee also stated it wouldn't be necessary to restate results regarding company practices in connection with equipment acquired in purchase business combinations between 1997 and 2000.
The committee also found that some of its commitments or concessions to suppliers had not been disclosed and that the company improperly recognized revenue from transactions involving undisclosed inducements. The committee further found that, as a result of instructions given by former employees, documents that would have permitted the linkage of the sales and inducements had not been created. "As a result, the true nature of certain of these transactions was concealed," added the statement.
In addition, the committee concluded that United's historical practices concerning its accounting for purchase business combinations "were not adequate" between 1997 and 2000. These included, among other things, the use of inconsistent valuation methodologies, some of which were reflected in memoranda that were not reviewed by the company's auditors; suggestions contained in those memoranda that improper methods of valuation be used (although the committee did not find evidence that such improper methods were applied); inadequate supervision of personnel; and inadequate coordination with providers of outside valuations.
"Because it was unable to validate the company's reported depreciation expense for, and income recognized on, sales of equipment acquired in purchase business combinations, the committee concluded that certain company personnel may have sought to manipulate opening balance sheet values for equipment acquired in purchase business combinations by causing them to be understated and that these opening balance sheet values may have been understated by an amount the committee was unable to determine," the statement added.