Regulation

Fifth Third, former CFO settle with SEC over improper accounting

180px-Fifth_Third_Bank.svg_Fifth Third Bank agreed last week to pay $6.5 million to the SEC to settle charges that the company and its former CFO Daniel Poston failed to maintain proper accounting practices for commercial real estate loans during the financial crisis.

The SEC alleged in its order that Fifth Third saw a decline in non-performing assets as a result of the housing bubble and failure by borrowers to repay loans as agreed. In the third quarter of 2008, Fifth Third decided to sell large pools of the troubled loans, and U.S. accounting rules required the company to classify the loans as “held for sale” and to value them at fair value.

Proper accounting practices would have increased the bank’s pretax loss for the third quarter by 132 percent, but the SEC alleges that the bank continued to list the loans as “held for investment,” which incorrectly suggested that it had not decided to sell the loans.

The SEC also alleged in its order that Poston had knowledge of the bank’s plan to sell the loans, which included agreements with brokers, though he made inaccurate statements to auditors about the company’s loan classifications and verified the company’s inaccurate financial results for the third quarter.

“Improper accounting by Fifth Third and Poston misled investors during a time of significant upheaval and financial distress for the company,” George S. Canellos, the co-director of the SEC’s Division of Enforcement, said. “It is important for investors to know the financial consequences of decisions made by management, so accounting rules that depend on management’s intent must be scrupulously observed.”

In addition to the $6.5 million penalty for the bank, Poston will pay a $100,000 penalty and will be suspended from practicing as an accountant by any entity regulated by the SEC.

“By failing to classify large pools of loans as required, Fifth Third and Poston kept investors from knowing the full truth behind its commercial real estate loan portfolio,” Stephen L. Cohen, an associate director in the SEC’s Division of Enforcement, said.

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