25 NOV 2024 / ALL REGULATORY UPDATES

SEC Imposes $45M Fine on UPS for Improper Overvaluation

Ever heard the saying, "What goes up must come down?" Well, UPS is living it right now straight into a $45 million fine from the SEC. Yep, the delivery giant got flagged for inflating the value of its freight business, and the SEC wasn’t about to let it slide. You gotta wonder, how does one of the world’s biggest logistics companies trip over its books? Let’s dig in and see what went wrong—and why you might want to keep an eye on those balance sheets.

Freight Flub or Fancy Accounting?

Back in 2019 and 2020, UPS took some creative liberties (to put it lightly) when valuing its freight business. The SEC claims the company didn’t follow the all-important GAAP standards—those trusty accounting rules designed to keep financial reporting legit. If UPS had played by the book, the SEC says their earnings would’ve been "materially lower." So, what did UPS say about this? The company didn’t exactly admit guilt, but they also didn’t fight the charges. In classic corporate-speak, they promised to “avoid similar violations in the future.”

Goodwill Hunting Gone Wrong?

Goodwill is a non-cash asset on a company’s balance sheet when it acquires another business. It essentially reflects the premium they paid over the fair value of the acquired assets. According to U.S. accounting rules, companies must keep goodwill as a line item on their balance sheets but are required to reduce its value if there’s evidence of a permanent decline. To stay compliant, businesses need to test goodwill for impairment at least once a year.

The $800M Freight Sale: A Sweet Exit or Sour Deal?

According to an SEC order, UPS brought in an external consultant to value its freight business but left out some important details. The company reportedly didn’t share its internal analysis, which showed that a future buyer would likely expect significantly lower profits from Freight after the sale. This was because the business would no longer benefit from the synergies and cost savings it had while under UPS's umbrella.

In 2021, UPS sold its freight business to TFI International for $800 million. Despite the SEC's findings, UPS shares were up 1.9% as of 10:15 a.m. in New York.

So, What’s the Takeaway?

UPS’s tumble with the SEC serves up a reminder: even corporate giants can faceplant when transparency takes a back seat. Sure, the company has settled the matter and insists it won’t rock the boat moving forward. But you have to ask, how does a company worth billions misplace a few accounting principles? In the end, UPS may have paid its dues, but the spotlight on its books isn’t dimming anytime soon. For now, they’ll keep delivering packages—just hopefully not be any more surprises for investors.