Revenue Recognition

L3 Technologies Settles $1.6M Revenue Recognition Case

The SEC also accused the company of failing to maintain adequate internal controls after employees reported their concerns to the ethics board.
Sean AlloccaJanuary 12, 2017
L3 Technologies Settles $1.6M Revenue Recognition Case

One of the largest U.S. defense contractors has agreed to pay more than $1.6 million to settle charges of booking millions of dollars in improper revenue that allowed some executives to “barely satisfy” targets for incentive bonuses, the SEC said on Wednesday.

L3 Technologies is accused of improperly recording $17.9 million in revenue from a contract with the U.S. Army. In 2013, while under contract with the Army, L3 found it had performed work that it had not been paid for. A senior finance official ordered 69 invoices be generated, even though there was never any agreement with the Army on payment for the work, the SEC said. The invoices were never delivered, but L3 recorded the revenue anyway.

“Because of that revenue, employees [in L3’s Army Sustainment Division] barely satisfied an internal target for management incentive bonuses,” the SEC said.

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L3 is also accused of failing to maintain adequate internal controls after employees immediately reported their concerns to the company’s ethics board. The subsequent ethics review, however, failed to uncover the misconduct. Company investigators were unable to fully “understand the billing process,” according to the complaint.

The ethics board concluded there was no improper revenue recognition and the issue was not elevated to the company’s audit committee. But, after an external investigation in October 2014, L3 accepted that material weaknesses existed in its internal controls and revised its financial statements from 2011 to 2014.

“Adequate internal accounting controls function as a critical safeguard against this type of improper revenue recognition… ” said Andrew Calamari, director of the SEC’s New York office. “L3 failed to have such controls in place, which rendered inaccurate its books and records.”

The SEC investigation uncovered additional accounting errors, which when combined with the 69 undelivered invoices, overstated the company’s pre-tax income by $169 million.

L3 Technologies has neither admitted nor denied the findings.

A former contractor, Robert A. Martin, who filed a whistleblower complaint exposing a related case in 2014, received almost $800,000 as an award, the SEC said.

L3 Technologies, formerly known as L-3 Communications Corp., settled multiple charges with federal regulators in 2015, including a $25.6 million dollar penalty for selling defective weapon sights and a $4.6 million settlement for inflating labor hours it charged to the government.

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