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Facebook Is Bracing for a Record Fine Over Privacy Transgressions, but Investors Just Shrug

Evan Niu, CFA, The Motley Fool

As part of Facebook's (NASDAQ: FB) first-quarter earnings release last night, the social networking behemoth disclosed that it has set aside billions of dollars for an accounting accrual to cover a massive fine that it expects the U.S. Federal Trade Commission to impose on the company over its numerous privacy transgressions in recent years. Facebook wrote:

In the first quarter of 2019, we reasonably estimated a probable loss and recorded an accrual of $3.0 billion in connection with the inquiry of the FTC into our platform and user data practices, which accrual is included in accrued expenses and other current liabilities on our condensed consolidated balance sheet. We estimate that the range of loss in this matter is $3.0 billion to $5.0 billion. The matter remains unresolved, and there can be no assurance as to the timing or the terms of any final outcome.

The accrual dinged Facebook's bottom line, with the company posting net income of "just" $2.4 billion, or $0.85 per share, in the first quarter. Investors were largely unfazed, still sending shares higher.

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Image source: Facebook.

Background on the FTC probe

The FTC had initially opened its probe into Facebook back in March 2018 following revelations that Cambridge Analytica was able to improperly access user data on nearly 90 million Facebook users. The acting director of the FTC's Bureau of Consumer Protection at the time said the agency "takes very seriously recent press reports raising substantial concerns about the privacy practices of Facebook."

As the probe has neared completion, reports surfaced in recent months that Facebook was in negotiations with the FTC. A fine of $3 billion to $5 billion would be a record, potentially representing the largest privacy-related civil penalty ever imposed by the agency, according to The Washington Post.

On the conference call, CFO Dave Wehner provided a little bit of detail, but wasn't able to say that much since negotiations are still ongoing:

Look, the accrual is an accounting entry related to the ongoing settlement discussions that we're having with the FTC. This matter is not resolved. So the actual amount of payment remains uncertain. However, we're estimating this range of loss to be $3 billion to $5 billion. Can't really comment further as this is an ongoing matter. We booked at the low end of the range in accordance with the applicable accounting guidance. So really not much more to add on that front.

Investors aren't concerned

While that potential fine would be a record-setter for the government agency, it's a relatively small ding in Facebook's overall financials. Investors were much more impressed with the fact that total revenue jumped 26% to $15.1 billion, the company's privacy scandals have not hurt user engagement meaningfully, and Facebook's family audience metric held steady at 2.7 billion monthly active users (MAUs).

There might even be more to come: Canadian regulators announced today that Facebook broke privacy laws related to the Cambridge Analytica scandal. Canadian regulators don't have the ability to impose fines, but argue that the case proves they need that authority, since the "ability to levy meaningful fines would be an important starting point" to get Facebook to change its ways.

Until Facebook users start caring more about the privacy costs associated with using the platform, investors will just consider fines like this to be part of the business.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Evan Niu, CFA owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.