UPS (NYSE: UPS) agreed Friday to pay $45 million to resolve U.S. Securities and Exchange Commission (SEC) allegations that it improperly priced its freight business, leading to misrepresented financial results in the 2019 and in 2020. The SEC alleges that Atlanta The Italy-based carrier failed to follow generally accepted accounting principles (GAAP), significantly overstating the value of its UPS Freight unit.
SEC Findings and Settlement
The SEC investigation revealed that UPS relied on an outside consultant to evaluate the value of its freight business. However, the company has withheld critical internal analysis that points to a much lower valuation. The consultant valued UPS Freight at $2 billion, far exceeding UPS’s internal estimate of $650 million. The SEC said that if UPS had used its calculations, the company would have been required to record a goodwill impairment charge of $500 million, resulting in significantly lower reported earnings.
Goodwill is recorded when a company purchases another business for an amount greater than the fair value of its assets. In the case of UPS, its freight unit had significantly underperformed and the value placed on goodwill no longer reflected economic reality. SEC Associate Director Melissa Hodgman emphasized the importance of accurate valuations, saying, “Goodwill balances provide investors with valuable information about whether companies are successfully managing the businesses they own.”
Under US accounting rules, companies must annually test goodwill for impairment. The SEC noted that UPS ignored clear evidence of impairment, further compounding the problem by failing to disclose a non-binding 2020 term sheet to sell the transportation unit for $800 million, less than half the consultant’s estimate.
UPS neither admitted nor denied wrongdoing as part of the settlement, but agreed to prevent future violations.
Impact on UPS and market reaction
Despite the allegations and the settlement, UPS shares rose 1.9% on Friday and are currently 2.63% higher at $134.8, reflecting investor confidence in the company’s broader financial stability.
UPS pointed out that the settlement amount had already been accounted for on its balance sheet.