Beazer Homes USA and the U.S. Securities and Exchange Commission reached a settlement yesterday that resolves an investigation by the Commission into improper or illegal accounting practices by the builder during the years 2000 to 2007.
However, the builder isn't out of the woods yet, as the SEC is still looking into activities by Beazer’s officers, and the company’s now-defunct mortgage subsidiary continues to be under investigation by the state of North Carolina over allegations of consumer fraud.
In this new settlement, Atlanta-based Beazer neither admitted nor denied any wrongdoing by consenting to a “cease and desist” order by the SEC, which requires the builder to comply fully with certain provisions of federal securities laws and regulations in its accounting. A Beazer spokesperson told several newspapers that the company would not comment beyond the release it posted on its Web site. But the SEC’s order says the settlement requires Beazer to provide the Commission with documentation it might need for future inquiries. The settlement did not include any fines against Beazer.
In its Sept. 24 Order, SEC said that it had found Beazer, the industry’s eighth-largest home builder, to have “fraudulently misstated its net income for the purpose of improperly managing its quarterly and annual earnings” during certain periods between 2000 and 2007 in the following ways:
• Beazer created “reserves” on its books for land inventory and construction costs that allowed the company to manipulate the earnings it reported to shareholders. For example, between fiscal years 2000 and 2005, Beazer understated its net income by $6 million due to excess “house cost to complete” accruals. Using the same improper accounting practices, the builder overstated its fiscal year 2006 net income by more than $1.2 million. By using reserves to “smooth over” the peaks and valleys of its profitability and meet analyst expectations, Beazer understated its net income by a total of $42 million for fiscal years 2000 through 2005. During the first two quarters of fiscal 2007, Beazer understated its net loss of $102 million by $1 million due to the reversal of improper land inventory reserves.
• Throughout fiscal 2006, Beazer improperly accounted for leasing 557 of its 793 model homes as sale-leasebacks to improve its financial results. By doing so, it overstated its fiscal year 2006 revenues by $117 million and net income by $14 million. For the first two quarters of fiscal 2007, Beazer understated its revenue by $2.6 million and overstated its net loss by $3.9 million.
Kit Addleman, the SEC’s regional director in Atlanta, tells BUILDER this morning that three factors went into the Commission’s decision not to impose harsher remedies on Beazer for its accounting improprieties. “The first was the cooperation that the company has shown to move the investigation forward,” she explains. The second relates the changes that she says Beazer has made by putting in new controls over its accounting practices “to prevent people from circumventing them.” (Beazer has also adjusted its financial statements for the years 1998 through the second quarter of 2007 to restate its earnings and losses.)
Addleman adds that the SEC has guidelines about when it can impose fines against companies, which take into account the impact of such penalties on the company and its shareholders. Apparently, Beazer’s violations did not fall within those guidelines.
At least one anaylst, UBS's David Goldberg, responded to the settlement by saying that it did not change his estimation that Beazer would continue "to underperform its better-positioned peers."
John Caulfield is a senior editor at BUILDER magazine.
Learn more about markets featured in this article: Atlanta, GA.
