L3, Accounting, Failure

A former finance executive at a subsidiary of L3 Technologies has been charged with improperly recognizing $17.9 million in revenue from an aircraft maintenance contract with the U.S. Army.

The U.S. Securities and Exchange Commission said David Pruitt, formerly vice president of finance at L3’s Army Sustainment Division (ASD), created dozens of invoices associated with unresolved claims against the Army that were not actually delivered at the same time that the revenue was recorded.

Another executive — former ASD President Mark Wentlent — was charged with failing to follow up on red flags that Pruitt had improperly recognized the revenue.

L3 agreed in January to pay $1.6 million to settle charges that it failed to maintain accurate books and records and had inadequate internal accounting controls. According to the SEC, the extra revenue enabled ASD employees to barely satisfy an internal target for bonus payments, with Pruitt receiving $62,100 and Wentlent receiving $183,500.

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“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,” Andrew M. Calamari, director of the SEC’s New York Regional Office, said in a news release.

The five-year contract between ASD and the Army provided for the maintenance of about 100 C-12 airplanes. After learning that ASD had unaccounted for costs related to the contract in the range of $30 to $35 million, Pruitt allegedly directed a subordinate to create 69 invoices related to unresolved claims under the contract and withhold delivery of those invoices from the Army.

“The vast majority of these invoices were never submitted to the U.S. Army, but instead were discovered during an investigation of ASD’s finances approximately six months later,” the SEC said in an administrative order.

In an email to another executive, the contract business manager suggested the invoicing was “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.”

Wentlent agreed to pay a $25,000 penalty while Pruitt faces a hearing before an administrative law judge.

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