UPS Fined by SEC for Freight Accounting Error

The Securities and Exchange Commission (SEC) recently made headlines by announcing that United Parcel Service Inc. (UPS) has agreed to pay a hefty $45 million penalty. This penalty comes in response to UPS misrepresenting its earnings due to a misstep in valuing its UPS Freight business unit. This story highlights the importance of transparency, following accounting principles, and the consequences of failing to acknowledge impairments to goodwill when necessary.

This issue began in 2019 when UPS took a deep dive into its UPS Freight unit, which was not performing as well as expected in handling less-than-truckload shipments. The unit was valued on UPS’s books at $1.4 billion, including $500 million in goodwill. During this analysis, UPS estimated that Freight would only sell for around $650 million, which meant they needed to write down the goodwill value on their balance sheet. However, instead of using this internal estimate, UPS mistakenly turned to an outside consultant whose valuation was triple the company’s own estimate. This error resulted in UPS avoiding an impairment charge.

In 2020, UPS entered a preliminary agreement to sell Freight for $800 million, but this price was likely to be reduced. Nevertheless, UPS did not share this updated information with their valuation consultant, who once again estimated Freight’s worth at $2 billion. By not recognizing this impairment, UPS’s reported earnings for 2019 and 2020 were inflated.

Ultimately, in the fourth quarter of 2020, when UPS sold Freight for $650 million and had to book a $500 million impairment charge, its net income decreased by 20%. This misunderstanding of accounting principles led to further issues when UPS claimed no signs of impairment in their financial reports while negotiations were ongoing to sell Freight for significantly less than its carrying value.

The SEC found UPS in violation of various securities fraud provisions and imposed a $45 million penalty. UPS agreed to take corrective actions and implement training programs to prevent similar issues in the future. This incident serves as a cautionary tale for all companies about the importance of accurate financial reporting, internal controls, and proper valuation practices, especially when dealing with goodwill impairments. Organizations must prioritize transparent and reliable financial reporting to avoid regulatory penalties and reputational damage.