In re KENT N. SMITH

Warning: TT: undefined function: 3


 
 
 
  
 UNITED STATES OF AMERICA 
 Before the 
 SECURITIES AND EXCHANGE COMMISSION 
 
SECURITIES EXCHANGE ACT OF 1934 
Release No. 98297 / September 6, 2023 
 
ADMINISTRATIVE PROCEEDING 
File No. 3-21616 
 
In the Matter of 
 
KENT N. SMITH,  
 
Respondent. 
 
ORDER INSTITUTING CEASE-AND-
DESIST PROCEEDINGS, PURSUANT TO 
SECTION 21C OF THE SECURITIES 
EXCHANGE ACT OF 1934, MAKING 
FINDINGS, AND IMPOSING A CEASE-
AND-DESIST ORDER  
   
I. 
 
 The Securities and Exchange Commission (“Commission” or “SEC”) deems it appropriate 
that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the 
Securities Exchange Act of 1934 (“Exchange Act”) against Kent N. Smith (“Smith” or 
“Respondent”).   
 
II. 
 
 In anticipation of the institution of these proceedings, Respondent has submitted an Offer 
of Settlement (the “Offer”) which the Commission has determined to accept.  Solely for the 
purpose of these proceedings and any other proceedings brought by or on behalf of the 
Commission, or to which the Commission is a party, and without admitting or denying the findings 
herein, except as to the Commission’s jurisdiction over the Respondent and the subject matter of 
these proceedings, which are admitted, and except as provided herein in Section V, Respondent 
consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Pursuant to Section 
21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist 
Order (“Order”), as set forth below. 
 
III. 
 
 On the basis of this Order and Respondent’s Offer, the Commission finds
1
 that  
 
1
 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding 
on any other person or entity in this or any other proceeding.  

 2 
Summary 
 
1. This matter stems from Smith’s involvement in Fluor Corporation’s (“Fluor”) 
percentage of completion (“POC”) accounting for a fixed-price construction project on which Fluor 
served as the subcontractor and carried a risk of cost overruns with respect to work within the 
contract’s scope. 
 
2. The project required Fluor to validate and complete the design and to build a one-of-
a-kind U.S Army facility for manufacturing nitrocellulose, an ammunition propellant, (“Radford” or 
the “Radford Project”).  In 2015, Fluor submitted a bid on the Radford Project, relying on overly 
optimistic cost and timing estimates.  Following the Radford Project’s subcontract award, Fluor 
experienced cost overruns that worsened over time. 
 
3. For the fiscal year ended December 31, 2017 and the first two quarters ended March 
31 and June 30, 2018 (“Relevant Period”), Smith, the then-Senior Vice President within the Fluor 
Government Group (“FGG”), a segment of Fluor, accepted materially inaccurate financial estimates 
for Radford.  Smith knew or should have known that these financial estimates caused materially 
overstated revenue to be recorded on Fluor’s books and records and likewise that certain 
anticipated additional costs were improperly excluded.  The result was that the overstated revenue 
kept the project forecast from a loss position.  Further, in support of the foregoing, Smith helped 
generate, reviewed, and accepted documents required by Fluor’s internal accounting controls, but 
which supported the incorrect revenue estimates and overstated revenue.  Smith thereby was a cause 
of Fluor’s failure to maintain a system of internal accounting controls sufficient to account for the 
Radford contract in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”).  
These failings resulted in Fluor’s maintaining inaccurate books and records and ultimately Fluor 
including materially misstated financial statements in periodic reports filed with the SEC for the 
fiscal year ended December 31, 2017 and the quarters ended March 31 and June 30, 2018.  Smith 
was a cause of Fluor’s filing these materially inaccurate financial statements in its periodic reports 
with the SEC. 
 
4. In August 2019, Fluor announced $714 million in pre-tax charges stemming from an 
“operational and strategic review” of sixteen projects, including Radford.  Prompted by the SEC 
staff’s investigation, Fluor undertook an internal investigation in 2020 that identified material 
weaknesses in its internal control over financial reporting and material errors in its financial 
statements and resulted in Fluor restating its annual and quarterly financial statements for its fiscal 
year 2016 through the third quarter of 2019, as disclosed in its 2019 Form 10-K filed with the SEC 
on September 25, 2020 (the “Restatement”).  The material weaknesses identified in the Restatement 
were attributable in part to control failures associated with the Radford Project, which resulted in 
material errors.  Throughout the Relevant Period, Fluor’s accounting issues on the Radford Project 
resulted in materially overstated net earnings in Fluor’s reported financial statements.  Regarding 
the Radford Project, Fluor overstated its annual net earnings by $38 million (25%) in 2017, 
understated its net loss by $8.7 million (33%) in the first quarter ended March 31, 2018 and 
overstated its net earnings by $7.5 million (10%) in the second quarter ended June 30, 2018.   
 

 3 
5. As a result of conduct detailed herein, Smith was a cause of Fluor’s violations of 
Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 13a-1, 13a-13, and 
12b-20 thereunder. 
 
Respondent 
 
6. Kent N. Smith, age 63, is a resident of Dillon, Montana.  He was Senior Vice 
President within FGG, and the head of the FGG subsidiary responsible for the Radford Project, 
from 2013 until July 2018, when he left the company.  He has never been registered with the 
Commission in any capacity.   
 
Relevant Entity 
 
7. Fluor Corporation is a Delaware corporation with its principal place of business in 
Irving, Texas.  Since registering its common stock with the SEC under Section 12(b) of the 
Exchange Act in 2000, Fluor has been required to file periodic reports on Forms 10-K and 10-Q 
with the SEC pursuant to Section 13(a) of the Exchange Act and related rules thereunder.  During 
the Relevant Period, the stock traded on the New York Stock Exchange under the ticker symbol 
“FLR.”  Fluor performs engineering, procurement, and construction services worldwide and 
operates through business segments, including FGG. 
 
Background 
 
8. Under GAAP, Fluor accounted for its fixed-price projects using the POC method, 
whereby it was required to periodically recognize the project’s costs as incurred and the revenue as 
a percentage of the work completed to date.  Under this method, each reporting period, a project 
team develops dependable estimates of expected total revenues, total costs, and total project gross 
margin (“PGM”) to arrive at the project’s financial forecast (known as the Estimate at Completion 
or “EAC”).  A project must recognize the entire amount of an anticipated loss as soon as the loss 
becomes evident. 
 
9. To periodically record a project’s EAC, Fluor required use of the Project Margin 
Analysis Report (“PMAR”), which should document project management’s most likely current 
estimate of the project’s revenue, cost, and PGM forecast.  Fluor’s internal accounting controls 
required that Smith, along with two other segment officers, provide sub-certifications to corporate-
level management with each signer representing that “to the best of our knowledge and belief,” the 
project forecasts represent management’s best estimate, and are in compliance with the applicable 
GAAP and Fluor’s policies, and also required that Smith sign the documentation supporting the 
accounting determinations for projects with significant risk.  
 
Radford Project 
 
10. In December 2015, Fluor finalized a $245 million fixed-price subcontract with its 
customer (“Customer”) for the Radford Project to validate and complete the design and to build the 
Radford Project.  As part of the scope of work, Fluor was provided an incomplete design from the 

 4 
prior, terminated subcontractor (“Prior Design”) that it was required to validate and complete when 
performing the subcontract.   
 
11. Smith and other FGG executives were told during the bidding process that agreeing 
to validate and complete the facility’s design was risky because FGG personnel did not know the 
Prior Design’s quality or completeness.  By early 2016, Smith, among other Fluor personnel, was 
aware that the incomplete and flawed Prior Design was causing significant additional cost and 
delay on the Radford Project.   
 
12. During the Relevant Period, the difference between the subcontract price and the 
anticipated total cost of the Radford Project grew significantly as delays and cost overruns 
worsened.  This growing anticipated total costs over the subcontract price should have prompted 
Fluor to revise the EAC to reflect all the additional anticipated costs.  Instead, Smith participated in 
formulating guidance, with accounting and other FGG personnel, indicating that generally costs 
should be added to the EAC only to the extent that the costs are offset by corresponding 
additional forecasted revenues.  This guidance did not comply with GAAP.  During the Relevant 
Period, Smith was a cause of Fluor personnel excluding costs from the EAC, consistent with this 
erroneous guidance.  As a result, Fluor’s forecasted cost in the EAC remained artificially low, 
which, when combined with Fluor forecasting revenue using overly high assumed rates of 
recovery, as described below, delayed recognition of a loss on the Radford Project.   
 
13. To address the growing anticipated total cost over the original subcontract price, 
Smith and other Fluor personnel determined to develop and submit change orders, also known as 
Project Change Notices (“PCNs”).  PCNs are proposed modifications of a contract that change the 
price or scope of work of the contract, or both.  The subcontract prescribed a process for 
submitting PCNs in appropriate circumstances.  Fluor submitted numerous PCNs on the Radford 
Project.  
 
14. Through fiscal year-end 2017, Fluor was required to record revenue for unapproved 
PCNs under POC accounting in compliance with ASC Subtopic 605-35, Construction-Type and 
Production-Type Contracts (“ASC 605-35”), and could only record it if recovery of the additional 
revenue was deemed probable.  Under ASC 605-35, a PCN should be evaluated as a “claim” if it 
was a change order in dispute, or unapproved as to both scope and price.  Revenue recognition for 
a claim under ASC 605-35 required a heightened level of evidence to demonstrate probable 
recovery.  
  
15. Smith supported the inclusion in the EAC of forecasted additional revenue from the 
unapproved PCNs, including rejected and not yet submitted PCNs, using overly high rates of 
assumed recovery on the PCN’s cost component.  Fluor used an assumed recovery rate of 100% of 
the costs, a decision in which Smith participated, during the year ended December 31, 2017.  The 
additional anticipated revenues from the PCNs offset corresponding forecasted costs and 
minimized the adverse impact on the PGM.  Fluor assumed these incorrect recovery rates despite 
its actual rates of recovery from approved PCNs being low.  
 

 5 
16. As part of the preparation of the 2017 year-end financial statements, Smith was 
involved in the preparation of documentation to support the recognition of revenue on the Radford 
Project under ASC 605-35, which was requested by Fluor financial personnel.  This control 
activity’s objective was to document the facts and analysis supporting revenue estimates on 
projects with significant risks and judgments in accordance with GAAP.  The documentation 
Smith assisted in drafting and ultimately signed failed to support that Fluor was entitled to the PCN 
revenue or that recovery from the Customer was probable.  This documentation, on which Fluor 
relied in reporting revenue on the Radford Project, stated that Fluor was entitled to payment 
because the Customer had misrepresented the status of the Prior Design prior to the execution of 
the subcontract.  But, Smith should have recognized that it was not probable under GAAP that 
Fluor would recover money from the Customer to pay for the delays and design issues 
underlying the majority of PCNs at the assumed 100% recovery rate based on, among other 
considerations, his experiences dealing with the Customer on the Radford Project.  Throughout 
the Relevant Period, the Customer had rejected many PCNs, blamed Fluor for the design 
problems, and maintained that Fluor was responsible for the additional costs under the terms of 
the existing fixed-price subcontract. 
 
17. In concluding recovery of the PCNs was probable for purposes of including the 
PCN revenue in the forecast, this documentation relied on a summarized version of a one-on-one 
meeting between Smith and a Customer employee, who had recently assumed operational 
responsibilities for the Radford Project,  stating that the Customer employee had “verbally 
acknowledged [Customer’s] responsibility for these changes and agreed to reconsider all rejected 
change orders, as well as begin reviewing and negotiating all PCNs with Fluor in late February.”  
Fluor financial personnel and others reviewing the documentation construed this to mean that the 
Customer was indicating that it would pay for the PCNs.  This conversation, however, did not 
support the document’s conclusion because the Customer employee had told Smith that the 
Customer would undertake a revamped process to assess PCNs, not that it would approve or pay 
for any individual PCN. 
 
18. Smith also signed the sub-certification to Fluor’s Chief Executive Officer 
(“CEO”) and Chief Financial Officer (“CFO”) for the fiscal year ending December 31, 2017, 
representing “to the best of his knowledge and belief” that, among other things, the financial 
information was presented in conformity with GAAP, that change orders unapproved as to 
scope, price, or both, had been recorded in accordance with ASC 605-35, and that all project 
forecasts represented management’s best estimate of Fluor’s financial results, when he knew or 
should have known that the financial estimates caused materially overstated revenue to be 
recorded on Fluor’s books and records and, likewise, that certain anticipated additional costs 
were improperly excluded.   
 
19. In the first quarter of 2018, Fluor adopted ASC 606, Revenue from Contracts with 
Customers (“ASC 606”), which superseded the revenue recognition requirements in ASC 605.  
Under ASC 606, Fluor could only include the unapproved PCNs in the revenue forecast if Fluor 
had an enforceable contractual right to additional revenue beyond the fixed contract price, 
considering all relevant facts and circumstances, including the terms of the contract.  For the first 
and second quarters of 2018, Fluor did not sufficiently evaluate under ASC 606 if it had an 

 6 
enforceable contractual right to the unapproved PCNs.  Without such an evaluation, it was 
improper to include revenue from the unapproved PCNs in its forecast for the two quarters ended 
March 31 and June 30, 2018.  Even if Fluor had sufficiently evaluated under ASC 606 whether it 
had an  enforceable contractual right to the unapproved, it was only permitted to increase forecast 
revenue to the extent it was probable that a significant reversal in the amount of cumulative 
revenue recognized would not occur, weighing factors such as the limited predictive value from 
Fluor’s prior experience given the low recovery rates, the length of time it would take to resolve 
and susceptibility to the judgment of third-parties.   
 
20. Fluor and Smith lacked sufficient evidence to support that recorded revenue arising 
from the unapproved PCNs would not be reversed.  For example, through the time he left Fluor in 
July 2018, Smith continued to approve the inclusion of revenue from unapproved change orders 
in the project PMAR, even though the Customer continued to reject PCNs and had approved only 
monetarily small PCNs.  Although the Customer continued to consider PCNs of greater monetary 
value, including most relating to the immaturity of the Prior Design, the Customer had already 
signaled it was less inclined to approve.   As a result, Fluor failed to maintain a system of internal 
accounting controls sufficient to prepare an estimate that complied with GAAP. 
 
21. During the quarter ended March 31, 2018, Fluor continued to use an assumed 
recovery rate of 100% on PCNs.  During the second quarter ended June 30, 2018, Fluor used an 
assumed 90% recovery rate.  The additional revenues from the PCNs offset additional forecasted 
costs and minimized the adverse impact on the PGM.  Fluor assumed these overly optimistic 
recovery rates despite its actual rates of recovery from approved PCNs continuing to be low.  
 
22. For the quarter ended March 31, 2018 and the quarter ended June 30, 2018, Smith 
continued to approve of the inclusion of revenue from the unapproved PCNs.  Smith signed sub-
certifications to Fluor’s CEO and CFO for the first quarter of March 31, 2018, with the same 
attestations as the prior sub-certification, but under ASC 606.   
 
23. The conduct described above resulted in inaccurate books and records in reporting 
periods from year-end 2017 through the second quarter of 2018.  Smith was aware of information 
indicating that the Radford Project’s EAC did not include all anticipated costs and that the assumed 
rate of recovery for the PCNs revenue was too high.  Smith therefore was a cause of Fluor’s 
improper inclusion of revenue for Radford unapproved PCNs in Fluor’s periodic filings with the 
SEC, due to the incorrect recovery rates on PCNs, as described below:  
 
Radford Project 4Q 2017 1Q 2018 2Q 2018 
Unapproved PCNs in revenue forecast, net of profit fee  $47M  $68M  $69M  
Assumed recovery rate of net PCN revenue in revenue 
forecast  
100% 100% 90% 
Percent of total PCN revenue actually approved by Customer 4.5% 3.9% 3.4% 
 
24. Smith also was a cause of Fluor’s improper exclusion of anticipated costs resulting 
in inaccurate books and records during the Relevant Period.  As a result of the errors described 
above, Fluor materially misstated its net earnings in periodic reports filed with the SEC as follows:  

 7 
 
Reporting Period Overstated Net Earnings 
 
As % of Reported Net 
Earnings (Loss) 
2017 (annual) $38.4 million 25% 
Q1 2018 $8.7 million (33%) 
Q2 2018 $7.5 million 10% 
 
Violations 
 
25. As a result of the conduct described above, Smith was a cause of Fluor’s violations 
of Section 13(a) of the Exchange Act and Rules 13a-1, 13a-13, and 12b-20 thereunder.  Section 
13(a) of the Exchange Act requires issuers with a class of securities registered pursuant to Section 
12 of the Exchange Act to file such periodic and other reports as the Commission may prescribe 
and in conformity with such rules as the Commission may promulgate. Exchange Act Rules 13a-1 
and 13a-13 require the filing of annual and quarterly reports, respectively. The obligation to file 
such reports embodies the requirement that they be true and correct. See, e.g., SEC v. Savoy Indus., 
Inc., 587 F.2d 1149, 1165 (D.C. Cir. 1978), cert. denied, 440 U.S. 913 (1979). In addition to the 
information expressly required to be included in such reports, Rule 12b-20 of the Exchange Act 
requires issuers to add such further material information, if any, as may be necessary to make the 
required statements, in the light of the circumstances under which they are made not misleading.   
 
26. As a result of the conduct described above, Smith was a cause of Fluor’s violations 
of Section 13(b)(2)(A) of the Exchange Act, which requires an issuer of a security registered 
pursuant to Section 12 of the Exchange Act to make and keep books, records, and accounts which, 
in reasonable detail, accurately and fairly reflect the issuer’s transactions and disposition of assets.   
 
27. As a result of the conduct described above, Smith was a cause of Fluor’s violations 
of Section 13(b)(2)(B) of the Exchange Act, which requires an issuer of a security registered 
pursuant to Section 12 of the Exchange Act to devise and maintain a system of internal accounting 
controls sufficient to provide reasonable assurances that: transactions are executed in accordance 
with management’s general and specific authorization; transactions are recorded as necessary to 
permit preparation of financial statements in conformity with GAAP or any other criteria 
applicable to such statements, and to maintain accountability for assets; access to assets is 
permitted only in accordance with management’s general or specific authorization; and the 
recorded accountability for assets is compared with the existing assets at reasonable intervals and 
appropriate action is taken with respect to any differences.   
 
IV. 
 
 In view of the foregoing, the Commission deems it appropriate to impose the sanctions 
agreed to in Respondent’s Offer. 
 
 Accordingly, it is hereby ORDERED that: 
 

 8 
 A. Pursuant to Section 21C of the Exchange Act, Respondent cease and desist from 
committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A), and 
13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder.   
 
B. Respondent shall, within 10 business days of the entry of this Order, pay a civil 
money penalty in the amount of $20,000 to the Securities and Exchange Commission.  If timely 
payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717.   
 
Payment must be made in one of the following ways:   
 
(1) Respondent may transmit payment electronically to the Commission, which 
will provide detailed ACH transfer/Fedwire instructions upon request;  
 
(2) Respondent may make direct payment from a bank account via Pay.gov 
through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or  
 
(3) Respondent may pay by certified check, bank cashier’s check, or United 
States postal money order, made payable to the Securities and Exchange 
Commission and hand-delivered or mailed to:  
 
Enterprise Services Center 
Accounts Receivable Branch 
HQ Bldg., Room 181, AMZ-341 
6500 South MacArthur Boulevard 
Oklahoma City, OK 73169 
 
Payments by check or money order must be accompanied by a cover letter identifying Kent 
N. Smith as a Respondent in these proceedings, and the file number of these proceedings; a copy of 
the cover letter and check or money order must be sent to Carolyn M. Welshhans, Division of 
Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549   
 
 C.   Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, a Fair Fund is 
created for the penalties referenced in paragraph B above.  This Fair Fund may be combined with 
the Fair Fund created in In the Matter of Fluor Corporation, AP File No. 3-21610.  Amounts 
ordered to be paid as civil money penalties pursuant to this Order shall be treated as penalties paid 
to the government for all purposes, including all tax purposes.  To preserve the deterrent effect of 
the civil penalty, Respondent agrees that in any Related Investor Action, he shall not argue that he 
is entitled to, nor shall he benefit by, offset or reduction of any award of compensatory damages by 
the amount of any part of Respondent’s payment of a civil penalty in this action (“Penalty Offset”).  
If the court in any Related Investor Action grants such a Penalty Offset, Respondent agrees that he 
shall, within 30 days after entry of a final order granting the Penalty Offset, notify the 
Commission's counsel in this action and pay the amount of the Penalty Offset to the Securities and 
Exchange Commission.  Such a payment shall not be deemed an additional civil penalty and shall 
not be deemed to change the amount of the civil penalty imposed in this proceeding.  For purposes 
of this paragraph, a “Related Investor Action” means a private damages action brought against 

 9 
Respondent by or on behalf of one or more investors based on substantially the same facts as 
alleged in the Order instituted by the Commission in this proceeding. 
 
V. 
It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section 
523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by 
Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other 
amounts due by Respondent under this Order or any other judgment, order, consent order, decree 
or settlement agreement entered in connection with this proceeding, is a debt for the violation by 
Respondent of the federal securities laws or any regulation or order issued under such laws, as set 
forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). 
 
 By the Commission. 
 
 
Vanessa A. Countryman 
Secretary 

UNITED STATES OF AMERICA 

 Before the 

 SECURITIES AND EXCHANGE COMMISSION 

 

SECURITIES EXCHANGE ACT OF 1934 

Release No. 98297 / September 6, 2023 

 

ADMINISTRATIVE PROCEEDING 

File No. 3-21616 

 

In the Matter of 

 

KENT N. SMITH,  

 

Respondent. 

 

ORDER INSTITUTING CEASE-AND-

DESIST PROCEEDINGS, PURSUANT TO 

SECTION 21C OF THE SECURITIES 

EXCHANGE ACT OF 1934, MAKING 

FINDINGS, AND IMPOSING A CEASE-

AND-DESIST ORDER  

   

I. 

 

 The Securities and Exchange Commission (“Commission” or “SEC”) deems it appropriate 

that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the 

Securities Exchange Act of 1934 (“Exchange Act”) against Kent N. Smith (“Smith” or 

“Respondent”).   

 

II. 

 

 In anticipation of the institution of these proceedings, Respondent has submitted an Offer 

of Settlement (the “Offer”) which the Commission has determined to accept.  Solely for the 

purpose of these proceedings and any other proceedings brought by or on behalf of the 

Commission, or to which the Commission is a party, and without admitting or denying the findings 

herein, except as to the Commission’s jurisdiction over the Respondent and the subject matter of 

these proceedings, which are admitted, and except as provided herein in Section V, Respondent 

consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Pursuant to Section 

21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist 

Order (“Order”), as set forth below. 

 

III. 

 

 On the basis of this Order and Respondent’s Offer, the Commission finds1 that  

 
1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding 

on any other person or entity in this or any other proceeding.  



 2 

Summary 

 

1. This matter stems from Smith’s involvement in Fluor Corporation’s (“Fluor”) 

percentage of completion (“POC”) accounting for a fixed-price construction project on which Fluor 

served as the subcontractor and carried a risk of cost overruns with respect to work within the 

contract’s scope. 
 

2. The project required Fluor to validate and complete the design and to build a one-of-

a-kind U.S Army facility for manufacturing nitrocellulose, an ammunition propellant, (“Radford” or 

the “Radford Project”).  In 2015, Fluor submitted a bid on the Radford Project, relying on overly 

optimistic cost and timing estimates.  Following the Radford Project’s subcontract award, Fluor 

experienced cost overruns that worsened over time. 

 

3. For the fiscal year ended December 31, 2017 and the first two quarters ended March 

31 and June 30, 2018 (“Relevant Period”), Smith, the then-Senior Vice President within the Fluor 

Government Group (“FGG”), a segment of Fluor, accepted materially inaccurate financial estimates 

for Radford.  Smith knew or should have known that these financial estimates caused materially 

overstated revenue to be recorded on Fluor’s books and records and likewise that certain 

anticipated additional costs were improperly excluded.  The result was that the overstated revenue 

kept the project forecast from a loss position.  Further, in support of the foregoing, Smith helped 

generate, reviewed, and accepted documents required by Fluor’s internal accounting controls, but 

which supported the incorrect revenue estimates and overstated revenue.  Smith thereby was a cause 

of Fluor’s failure to maintain a system of internal accounting controls sufficient to account for the 

Radford contract in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”).  

These failings resulted in Fluor’s maintaining inaccurate books and records and ultimately Fluor 

including materially misstated financial statements in periodic reports filed with the SEC for the 

fiscal year ended December 31, 2017 and the quarters ended March 31 and June 30, 2018.  Smith 

was a cause of Fluor’s filing these materially inaccurate financial statements in its periodic reports 

with the SEC. 

 

4. In August 2019, Fluor announced $714 million in pre-tax charges stemming from an 

“operational and strategic review” of sixteen projects, including Radford.  Prompted by the SEC 

staff’s investigation, Fluor undertook an internal investigation in 2020 that identified material 

weaknesses in its internal control over financial reporting and material errors in its financial 

statements and resulted in Fluor restating its annual and quarterly financial statements for its fiscal 

year 2016 through the third quarter of 2019, as disclosed in its 2019 Form 10-K filed with the SEC 

on September 25, 2020 (the “Restatement”).  The material weaknesses identified in the Restatement 

were attributable in part to control failures associated with the Radford Project, which resulted in 

material errors.  Throughout the Relevant Period, Fluor’s accounting issues on the Radford Project 

resulted in materially overstated net earnings in Fluor’s reported financial statements.  Regarding 

the Radford Project, Fluor overstated its annual net earnings by $38 million (25%) in 2017, 

understated its net loss by $8.7 million (33%) in the first quarter ended March 31, 2018 and 

overstated its net earnings by $7.5 million (10%) in the second quarter ended June 30, 2018.   

 



 3 

5. As a result of conduct detailed herein, Smith was a cause of Fluor’s violations of 

Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 13a-1, 13a-13, and 

12b-20 thereunder. 

 

Respondent 

 

6. Kent N. Smith, age 63, is a resident of Dillon, Montana.  He was Senior Vice 

President within FGG, and the head of the FGG subsidiary responsible for the Radford Project, 

from 2013 until July 2018, when he left the company.  He has never been registered with the 

Commission in any capacity.   

 

Relevant Entity 

 

7. Fluor Corporation is a Delaware corporation with its principal place of business in 

Irving, Texas.  Since registering its common stock with the SEC under Section 12(b) of the 

Exchange Act in 2000, Fluor has been required to file periodic reports on Forms 10-K and 10-Q 

with the SEC pursuant to Section 13(a) of the Exchange Act and related rules thereunder.  During 

the Relevant Period, the stock traded on the New York Stock Exchange under the ticker symbol 

“FLR.”  Fluor performs engineering, procurement, and construction services worldwide and 

operates through business segments, including FGG. 

 

Background 

 

8. Under GAAP, Fluor accounted for its fixed-price projects using the POC method, 

whereby it was required to periodically recognize the project’s costs as incurred and the revenue as 

a percentage of the work completed to date.  Under this method, each reporting period, a project 

team develops dependable estimates of expected total revenues, total costs, and total project gross 

margin (“PGM”) to arrive at the project’s financial forecast (known as the Estimate at Completion 

or “EAC”).  A project must recognize the entire amount of an anticipated loss as soon as the loss 

becomes evident. 

 

9. To periodically record a project’s EAC, Fluor required use of the Project Margin 

Analysis Report (“PMAR”), which should document project management’s most likely current 

estimate of the project’s revenue, cost, and PGM forecast.  Fluor’s internal accounting controls 

required that Smith, along with two other segment officers, provide sub-certifications to corporate-

level management with each signer representing that “to the best of our knowledge and belief,” the 

project forecasts represent management’s best estimate, and are in compliance with the applicable 

GAAP and Fluor’s policies, and also required that Smith sign the documentation supporting the 

accounting determinations for projects with significant risk.  

 

Radford Project 

 

10. In December 2015, Fluor finalized a $245 million fixed-price subcontract with its 

customer (“Customer”) for the Radford Project to validate and complete the design and to build the 

Radford Project.  As part of the scope of work, Fluor was provided an incomplete design from the 



 4 

prior, terminated subcontractor (“Prior Design”) that it was required to validate and complete when 

performing the subcontract.   

 

11. Smith and other FGG executives were told during the bidding process that agreeing 

to validate and complete the facility’s design was risky because FGG personnel did not know the 

Prior Design’s quality or completeness.  By early 2016, Smith, among other Fluor personnel, was 

aware that the incomplete and flawed Prior Design was causing significant additional cost and 

delay on the Radford Project.   

 

12. During the Relevant Period, the difference between the subcontract price and the 

anticipated total cost of the Radford Project grew significantly as delays and cost overruns 

worsened.  This growing anticipated total costs over the subcontract price should have prompted 

Fluor to revise the EAC to reflect all the additional anticipated costs.  Instead, Smith participated in 

formulating guidance, with accounting and other FGG personnel, indicating that generally costs 

should be added to the EAC only to the extent that the costs are offset by corresponding 

additional forecasted revenues.  This guidance did not comply with GAAP.  During the Relevant 

Period, Smith was a cause of Fluor personnel excluding costs from the EAC, consistent with this 

erroneous guidance.  As a result, Fluor’s forecasted cost in the EAC remained artificially low, 

which, when combined with Fluor forecasting revenue using overly high assumed rates of 

recovery, as described below, delayed recognition of a loss on the Radford Project.   

 

13. To address the growing anticipated total cost over the original subcontract price, 

Smith and other Fluor personnel determined to develop and submit change orders, also known as 

Project Change Notices (“PCNs”).  PCNs are proposed modifications of a contract that change the 

price or scope of work of the contract, or both.  The subcontract prescribed a process for 

submitting PCNs in appropriate circumstances.  Fluor submitted numerous PCNs on the Radford 

Project.  

 

14. Through fiscal year-end 2017, Fluor was required to record revenue for unapproved 

PCNs under POC accounting in compliance with ASC Subtopic 605-35, Construction-Type and 

Production-Type Contracts (“ASC 605-35”), and could only record it if recovery of the additional 

revenue was deemed probable.  Under ASC 605-35, a PCN should be evaluated as a “claim” if it 

was a change order in dispute, or unapproved as to both scope and price.  Revenue recognition for 

a claim under ASC 605-35 required a heightened level of evidence to demonstrate probable 

recovery.  

  

15. Smith supported the inclusion in the EAC of forecasted additional revenue from the 

unapproved PCNs, including rejected and not yet submitted PCNs, using overly high rates of 

assumed recovery on the PCN’s cost component.  Fluor used an assumed recovery rate of 100% of 

the costs, a decision in which Smith participated, during the year ended December 31, 2017.  The 

additional anticipated revenues from the PCNs offset corresponding forecasted costs and 

minimized the adverse impact on the PGM.  Fluor assumed these incorrect recovery rates despite 

its actual rates of recovery from approved PCNs being low.  

 



 5 

16. As part of the preparation of the 2017 year-end financial statements, Smith was 

involved in the preparation of documentation to support the recognition of revenue on the Radford 

Project under ASC 605-35, which was requested by Fluor financial personnel.  This control 

activity’s objective was to document the facts and analysis supporting revenue estimates on 

projects with significant risks and judgments in accordance with GAAP.  The documentation 

Smith assisted in drafting and ultimately signed failed to support that Fluor was entitled to the PCN 

revenue or that recovery from the Customer was probable.  This documentation, on which Fluor 

relied in reporting revenue on the Radford Project, stated that Fluor was entitled to payment 

because the Customer had misrepresented the status of the Prior Design prior to the execution of 

the subcontract.  But, Smith should have recognized that it was not probable under GAAP that 

Fluor would recover money from the Customer to pay for the delays and design issues 

underlying the majority of PCNs at the assumed 100% recovery rate based on, among other 

considerations, his experiences dealing with the Customer on the Radford Project.  Throughout 

the Relevant Period, the Customer had rejected many PCNs, blamed Fluor for the design 

problems, and maintained that Fluor was responsible for the additional costs under the terms of 

the existing fixed-price subcontract. 

 

17. In concluding recovery of the PCNs was probable for purposes of including the 

PCN revenue in the forecast, this documentation relied on a summarized version of a one-on-one 

meeting between Smith and a Customer employee, who had recently assumed operational 

responsibilities for the Radford Project,  stating that the Customer employee had “verbally 

acknowledged [Customer’s] responsibility for these changes and agreed to reconsider all rejected 

change orders, as well as begin reviewing and negotiating all PCNs with Fluor in late February.”  

Fluor financial personnel and others reviewing the documentation construed this to mean that the 

Customer was indicating that it would pay for the PCNs.  This conversation, however, did not 

support the document’s conclusion because the Customer employee had told Smith that the 

Customer would undertake a revamped process to assess PCNs, not that it would approve or pay 

for any individual PCN. 

 

18. Smith also signed the sub-certification to Fluor’s Chief Executive Officer 

(“CEO”) and Chief Financial Officer (“CFO”) for the fiscal year ending December 31, 2017, 

representing “to the best of his knowledge and belief” that, among other things, the financial 

information was presented in conformity with GAAP, that change orders unapproved as to 

scope, price, or both, had been recorded in accordance with ASC 605-35, and that all project 

forecasts represented management’s best estimate of Fluor’s financial results, when he knew or 

should have known that the financial estimates caused materially overstated revenue to be 

recorded on Fluor’s books and records and, likewise, that certain anticipated additional costs 

were improperly excluded.   

 

19. In the first quarter of 2018, Fluor adopted ASC 606, Revenue from Contracts with 

Customers (“ASC 606”), which superseded the revenue recognition requirements in ASC 605.  

Under ASC 606, Fluor could only include the unapproved PCNs in the revenue forecast if Fluor 

had an enforceable contractual right to additional revenue beyond the fixed contract price, 

considering all relevant facts and circumstances, including the terms of the contract.  For the first 

and second quarters of 2018, Fluor did not sufficiently evaluate under ASC 606 if it had an 



 6 

enforceable contractual right to the unapproved PCNs.  Without such an evaluation, it was 

improper to include revenue from the unapproved PCNs in its forecast for the two quarters ended 

March 31 and June 30, 2018.  Even if Fluor had sufficiently evaluated under ASC 606 whether it 

had an  enforceable contractual right to the unapproved, it was only permitted to increase forecast 

revenue to the extent it was probable that a significant reversal in the amount of cumulative 

revenue recognized would not occur, weighing factors such as the limited predictive value from 

Fluor’s prior experience given the low recovery rates, the length of time it would take to resolve 

and susceptibility to the judgment of third-parties.   

 

20. Fluor and Smith lacked sufficient evidence to support that recorded revenue arising 

from the unapproved PCNs would not be reversed.  For example, through the time he left Fluor in 

July 2018, Smith continued to approve the inclusion of revenue from unapproved change orders 

in the project PMAR, even though the Customer continued to reject PCNs and had approved only 

monetarily small PCNs.  Although the Customer continued to consider PCNs of greater monetary 

value, including most relating to the immaturity of the Prior Design, the Customer had already 

signaled it was less inclined to approve.   As a result, Fluor failed to maintain a system of internal 

accounting controls sufficient to prepare an estimate that complied with GAAP. 

 

21. During the quarter ended March 31, 2018, Fluor continued to use an assumed 

recovery rate of 100% on PCNs.  During the second quarter ended June 30, 2018, Fluor used an 

assumed 90% recovery rate.  The additional revenues from the PCNs offset additional forecasted 

costs and minimized the adverse impact on the PGM.  Fluor assumed these overly optimistic 

recovery rates despite its actual rates of recovery from approved PCNs continuing to be low.  

 

22. For the quarter ended March 31, 2018 and the quarter ended June 30, 2018, Smith 

continued to approve of the inclusion of revenue from the unapproved PCNs.  Smith signed sub-

certifications to Fluor’s CEO and CFO for the first quarter of March 31, 2018, with the same 

attestations as the prior sub-certification, but under ASC 606.   

 

23. The conduct described above resulted in inaccurate books and records in reporting 

periods from year-end 2017 through the second quarter of 2018.  Smith was aware of information 

indicating that the Radford Project’s EAC did not include all anticipated costs and that the assumed 

rate of recovery for the PCNs revenue was too high.  Smith therefore was a cause of Fluor’s 

improper inclusion of revenue for Radford unapproved PCNs in Fluor’s periodic filings with the 

SEC, due to the incorrect recovery rates on PCNs, as described below:  

 
Radford Project 4Q 2017 1Q 2018 2Q 2018 

Unapproved PCNs in revenue forecast, net of profit fee  $47M  $68M  $69M  

Assumed recovery rate of net PCN revenue in revenue 

forecast  
100% 100% 90% 

Percent of total PCN revenue actually approved by Customer 4.5% 3.9% 3.4% 

 

24. Smith also was a cause of Fluor’s improper exclusion of anticipated costs resulting 

in inaccurate books and records during the Relevant Period.  As a result of the errors described 

above, Fluor materially misstated its net earnings in periodic reports filed with the SEC as follows:  



 7 

 

Reporting Period Overstated Net Earnings 

 

As % of Reported Net 

Earnings (Loss) 

2017 (annual) $38.4 million 25% 

Q1 2018 $8.7 million (33%) 

Q2 2018 $7.5 million 10% 

 

Violations 

 

25. As a result of the conduct described above, Smith was a cause of Fluor’s violations 

of Section 13(a) of the Exchange Act and Rules 13a-1, 13a-13, and 12b-20 thereunder.  Section 

13(a) of the Exchange Act requires issuers with a class of securities registered pursuant to Section 

12 of the Exchange Act to file such periodic and other reports as the Commission may prescribe 

and in conformity with such rules as the Commission may promulgate. Exchange Act Rules 13a-1 

and 13a-13 require the filing of annual and quarterly reports, respectively. The obligation to file 

such reports embodies the requirement that they be true and correct. See, e.g., SEC v. Savoy Indus., 

Inc., 587 F.2d 1149, 1165 (D.C. Cir. 1978), cert. denied, 440 U.S. 913 (1979). In addition to the 

information expressly required to be included in such reports, Rule 12b-20 of the Exchange Act 

requires issuers to add such further material information, if any, as may be necessary to make the 

required statements, in the light of the circumstances under which they are made not misleading.   

 

26. As a result of the conduct described above, Smith was a cause of Fluor’s violations 

of Section 13(b)(2)(A) of the Exchange Act, which requires an issuer of a security registered 

pursuant to Section 12 of the Exchange Act to make and keep books, records, and accounts which, 

in reasonable detail, accurately and fairly reflect the issuer’s transactions and disposition of assets.   

 

27. As a result of the conduct described above, Smith was a cause of Fluor’s violations 

of Section 13(b)(2)(B) of the Exchange Act, which requires an issuer of a security registered 

pursuant to Section 12 of the Exchange Act to devise and maintain a system of internal accounting 

controls sufficient to provide reasonable assurances that: transactions are executed in accordance 

with management’s general and specific authorization; transactions are recorded as necessary to 

permit preparation of financial statements in conformity with GAAP or any other criteria 

applicable to such statements, and to maintain accountability for assets; access to assets is 

permitted only in accordance with management’s general or specific authorization; and the 

recorded accountability for assets is compared with the existing assets at reasonable intervals and 

appropriate action is taken with respect to any differences.   

 

IV. 

 

 In view of the foregoing, the Commission deems it appropriate to impose the sanctions 

agreed to in Respondent’s Offer. 

 

 Accordingly, it is hereby ORDERED that: 

 



 8 

 A. Pursuant to Section 21C of the Exchange Act, Respondent cease and desist from 

committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A), and 

13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder.   

 

B. Respondent shall, within 10 business days of the entry of this Order, pay a civil 

money penalty in the amount of $20,000 to the Securities and Exchange Commission.  If timely 

payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717.   

 

Payment must be made in one of the following ways:   

 

(1) Respondent may transmit payment electronically to the Commission, which 

will provide detailed ACH transfer/Fedwire instructions upon request;  

 

(2) Respondent may make direct payment from a bank account via Pay.gov 

through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or  

 

(3) Respondent may pay by certified check, bank cashier’s check, or United 

States postal money order, made payable to the Securities and Exchange 

Commission and hand-delivered or mailed to:  

 

Enterprise Services Center 

Accounts Receivable Branch 

HQ Bldg., Room 181, AMZ-341 

6500 South MacArthur Boulevard 

Oklahoma City, OK 73169 

 

Payments by check or money order must be accompanied by a cover letter identifying Kent 

N. Smith as a Respondent in these proceedings, and the file number of these proceedings; a copy of 

the cover letter and check or money order must be sent to Carolyn M. Welshhans, Division of 

Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549   

 

 C.   Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, a Fair Fund is 

created for the penalties referenced in paragraph B above.  This Fair Fund may be combined with 

the Fair Fund created in In the Matter of Fluor Corporation, AP File No. 3-21610.  Amounts 

ordered to be paid as civil money penalties pursuant to this Order shall be treated as penalties paid 

to the government for all purposes, including all tax purposes.  To preserve the deterrent effect of 

the civil penalty, Respondent agrees that in any Related Investor Action, he shall not argue that he 

is entitled to, nor shall he benefit by, offset or reduction of any award of compensatory damages by 

the amount of any part of Respondent’s payment of a civil penalty in this action (“Penalty Offset”).  

If the court in any Related Investor Action grants such a Penalty Offset, Respondent agrees that he 

shall, within 30 days after entry of a final order granting the Penalty Offset, notify the 

Commission's counsel in this action and pay the amount of the Penalty Offset to the Securities and 

Exchange Commission.  Such a payment shall not be deemed an additional civil penalty and shall 

not be deemed to change the amount of the civil penalty imposed in this proceeding.  For purposes 

of this paragraph, a “Related Investor Action” means a private damages action brought against 

http://www.sec.gov/about/offices/ofm.htm


 9 

Respondent by or on behalf of one or more investors based on substantially the same facts as 

alleged in the Order instituted by the Commission in this proceeding. 

 

V. 

It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section 

523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by 

Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other 

amounts due by Respondent under this Order or any other judgment, order, consent order, decree 

or settlement agreement entered in connection with this proceeding, is a debt for the violation by 

Respondent of the federal securities laws or any regulation or order issued under such laws, as set 

forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). 

 

 By the Commission. 

 

 

Vanessa A. Countryman 

Secretary