Navy Shipbuilder Admits To Financial Accounting Fraud

Austal USA LLC (Austal USA), a US Navy shipbuilder, has pleaded guilty in a major fraud investigation, raising serious questions about accountability and ethics in defense contracting.

At a Glance

Austal USA pleaded guilty to financial accounting fraud and obstructing a Defense Department audit.
The company agreed to pay $24 million to resolve the Justice Department’s investigation.
Austal USA manipulated financial metrics to mislead shareholders and auditors.
Three former executives have been indicted on multiple counts of wire fraud.

Guilty Plea and Financial Penalties

Austal USA, a prominent shipbuilder for the U.S. Navy and Coast Guard, has pleaded guilty to financial accounting fraud and for obstructing a Defense Department audit. The company will pay a $24 million fine as part of the settlement, a significant reduction from the original criminal penalty of $73,572,680.10 due to the company’s inability to pay. The Justice Department collaborated with the U.S. Securities and Exchange Commission (SEC) on this resolution.

Scheme to Manipulate Financial Metrics

From 2013 to 2016, Austal USA conspired to mislead auditors and shareholders by manipulating the “estimate at completion” (EAC), an accounting metric used to assess a project’s performance and profit. This fraudulent scheme resulted in the false overstating of Austal USA’s profitability and Austal Limited’s earnings, leading to a steep drop in stock prices once the actual costs were revealed. The company’s deceit eroded public trust and undermined the readiness of the Department of the Navy.

Consequences and Accountability

In addition to the financial penalties, Austal USA settled a False Claims Act case for supplying non-compliant parts to the U.S. Navy. Under the plea agreement, Austal USA will have to retain an independent compliance monitor for three years and implement a comprehensive compliance and ethics program. The company will also serve three years of probation. Furthermore, the SEC is tasked to distribute funds to the investors harmed by this fraudulent activity.

Austal USA Pleads Guilty to Fraud Scheme https://t.co/2RaMRR032O

— Maritime Reporter (@ShipNews) August 28, 2024

Legal Actions Against Executives

Three former executives of Austal USA have been indicted on multiple counts of wire fraud and conspiracy. These individuals allegedly used “program challenges” as fraudulent devices to conceal increasing costs, with the goal of maintaining and boosting Austal Limited’s stock price. When these underreported costs were exposed, Austal Limited had to write down over $100 million, leading to significant financial repercussions. The defendants face severe penalties, including up to 30 years in prison for conspiracy and wire fraud affecting a financial institution, and 20 years for each count of wire fraud.

Ongoing Investigations and Future Implications

Naval Criminal Investigative Service (NCIS) and Defense Criminal Investigative Service (DCIS), with assistance from international authorities and the Defense Contract Audit Agency (DCAA), continue to investigate this case. The Justice Department’s coordination with various federal and international entities highlights the gravity of the situation and shows a robust commitment to rooting out such economic crimes. A sentencing hearing for Austal USA is scheduled for November 25, marking a crucial step in upholding the rule of law in defense contracting.

“Defense contractors that engage in fraud erode the public’s trust in our Armed Forces,” said Director Omar Lopez of the NCIS. “NCIS and our investigative partners are determined to hold those accountable whose actions erode that trust. We are committed to rooting out economic crime that negatively impacts the readiness of the Department of the Navy.”