UPS Charged $45 Million by SEC for Inaccurate Valuation of Business Unit

The Securities and Exchange Commission (SEC) announced today that it had agreed on charges against United Parcel Service (UPS) in response to falsified earnings numbers resulting from its failure to comply with generally accepted accounting principles (GAAP) when valuing one of its poorest-performing subsidiaries.

According to the SEC's order, in 2019, UPS Freight, a subsidiary of UPS at the time that handled less-than-truckload deliveries, was valued by UPS to sell for roughly $650M or less. In accordance with GAAP, UPS should have used the price received from selling UPS Freight in its calculations to determine whether to write down the value of the goodwill assigned to Freight on UPS’s balance sheet. UPS’s own inquiry revealed that nearly $500M of goodwill linked to UPS Freight was, in fact, impaired.

However, instead of using that information, UPS relied on a valuation from a third-party consultant while withholding information the consultant needed to perform a proper assessment of UPS Freight. The consultant worked based on assumptions accepted by UPS, which, according to the SEC, “were clearly not assumptions a prospective buyer of Freight would make.” The consultant concluded that UPS Freight was valued at $2B. As a result, UPS recorded no goodwill impairment. Had UPS Freight been properly valued, it would have reported lower earnings.

The SEC further alleges that, in 2020, UPS entered into a non-binding term sheet to sell the subsidiary for $800M, while taking into account that any modifications needed later would likely lower the final selling price. Once again, instead of using its own analysis of Freight or the term sheet, UPS engaged a third-party consultant to value UPS Freight in an attempt to avoid impairing its goodwill. UPS did not inform the consultant of the term sheet, its own analysis, or other relevant information, and the results in 2020 were identical to those in 2019.

“Goodwill balances provide investors with valuable insight into whether companies are successfully operating the businesses they own. Therefore, it is essential for companies to prepare reliable fair value estimates and impair goodwill when required. UPS fell short of these obligations, repeatedly ignoring its own well-founded sale price estimates for Freight in favor of unreliable third-party valuations,” said Melissa Hodgman, Associate Director, SEC.

The order states that the SEC found UPS to be in violation of portions of the Securities Act and the Exchange Act, as well as other relevant rules. In addition to the penalty of $45M, UPS has agreed to take measures to prevent these types of violations in the future, such as adopting new training requirements and retaining an independent compliance consultant to review and advise on these matters and others related.

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