UPS Freight: Company Penalized $45M by the SEC

United Parcel Service Inc. (UPS) has agreed to pay a $45 million fine after the Securities and Exchange Commission (SEC) accused the company of misreporting its earnings. The SEC said UPS used flawed accounting methods to overvalue one of its business units, UPS Freight, leading to misleading financial reports.

The Problem with UPS Freight

UPS Freight was a division that handled less-than-truckload shipments. By 2019, the company estimated that UPS Freight would sell for no more than $650 million. Accounting rules require companies to adjust the value of goodwill—a measure of a business’s intangible assets like reputation—when evidence shows it is worth less.

UPS’s own analysis revealed nearly $500 million of goodwill tied to UPS Freight was no longer recoverable. But instead of reporting this, the company used an outside consultant to value the business. The consultant, working with incomplete information from UPS, estimated the unit was worth $2 billion—three times higher than UPS’s internal estimate.

This higher value meant UPS did not have to adjust the goodwill for UPS Freight in 2019. If it had, the company’s earnings for that year would have been much lower.

Repeat Issues in 2020

The SEC found that UPS made similar mistakes the next year. In 2020, UPS signed a non-binding agreement to sell UPS Freight for $800 million. The sale terms suggested the final price would likely be even lower after adjustments.

Despite this, UPS continued to use the consultant’s inflated valuation to avoid writing down goodwill. Once again, the consultant relied on assumptions provided by UPS—assumptions the SEC said were not realistic for any potential buyer. If UPS had reported the goodwill accurately, its 2020 earnings would also have been significantly lower.

SEC’s Findings and Penalty

The SEC criticized UPS for not following proper accounting standards. Melissa Hodgman, Associate Director of the SEC, said, “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.”

The SEC found that UPS broke several rules under securities laws, including those related to reporting, internal controls, and financial disclosures.

To resolve the case, UPS agreed to:

• Pay a $45 million penalty.
• Train key staff on proper accounting methods.
• Hire an independent compliance consultant to review and improve its accounting practices.

UPS neither admitted nor denied the SEC’s findings as part of the settlement.

Lessons from the UPS Freight Case

This case highlights why accurate accounting is crucial for investors. Misreporting financial details can mislead shareholders and harm trust in the company.

The SEC’s investigation is still ongoing and may result in further actions against others involved. This settlement sends a strong message to companies about the need for transparency and adherence to accounting rules.

UPS’s case serves as a reminder that businesses must prioritize accuracy and integrity in their financial reporting.