Internal financial controls broke down, inflating Granite Construction's initial financial performance report for 2019, and some staff and managers provided auditors investigating what had happened with "potentially misleading" information, the company said in its newly released 2019 annual report.
The wording of the Granite statement appears to open the door to further investigation for civil or criminal violations of securities law. The contractor, which had already informed the US Securities and Exchange Commission of its investigation, says the agency has now issued subpoenas related to the financial disclosure problems.
In its restatement of 2019 results, the Watsonville, Calif.-based company reported: "Forecasts were not always prepared to reflect the most probable outcome" about costs, project risks and potential claims.
In addition, employees sometimes provided internal and external auditors "incomplete and potentially misleading information" about "projects and forecasts" in the heavy-civil operating group. Forecasts sometimes reflected aggressive or optimistic projections, achievable targets, management directives or hoped-for efficiencies, the company stated.
In some cases, the company's auditors found that employees and management "knew or should have known" that forecasts and directives from management didn't comply with company policies and would have shown higher forecasted costs and project risks.
The company lost $90 million in 2019, on revenue of $3.4 billion, compared to net income of $600,000 in 2018. Project losses in Granite's heavy-civil operating unit were the biggest cause of a sharp decline in gross profit in 2019, the company reported.
In 2019 and 2018, the company now states, its heavy-civil operating group sustained gross losses of $138.7 million and $54.4 million, respectively.
Going back almost two years, the tone of the Granite's financial reporting was brighter.
In April 2019, the company attributed much of a $34-million loss in the first quarter, up from an $11-million loss in the first quarter of 2018, to cold and inclement weather. The backlog was growing, and the company was fine-tuning its bidding and pricing of work, noted James Roberts, chief executive at the time.
In new reports, Granite now states that it has determined it did not maintain effective internal control over financial reporting and disclosure procedures due to the existence of material weaknesses. As a result, it has implemented "certain" personnel and organizational changes.
Class-action securities and stockholder lawsuits filed in 2019 and 2020 against Granite, traded as GVA on the NY Stock Exchange, still are pending.