• Wed. Apr 24th, 2024

Bigger Problems for ADM Lurk Within Small Accounting Error Fix

The accounting problems at Archer-Daniels-Midland Co. were big: the CFO was suspended, federal authorities investigated, and the stock price plummeted as the company announced a probe into its accounting practices earlier this year.

When it came to correcting actual numbers, however, the company went small. The commodities giant on Tuesday revised three years of results for the operating segments at the center of its accounting woes via a so-called “Little R” revision, a quiet correction that doesn’t require the fanfare of releasing a special 8-K announcing a restatement or re-issuing old financial reports.

ADM tucked the corrections into its 10-K and told analysts and investors that Securities and Exchange Commission and Department of Justice investigations continued, but the errors were a small part of its financial results. It simultaneously said the revision didn’t trigger a review under new executive compensation clawback rules.

“We determined that the adjustments are not material to our consolidated financial statements, taken as a whole for any period,” CEO Juan Luciano told analysts on the company’s earnings call Tuesday.

The SEC requires companies that uncover errors in their past financial statements to correct them. Significant errors are considered red flags in financial reporting, forcing companies to issue statements that they need to fix their mistakes and then file updated financials with the SEC. Smaller errors can be corrected by revisions, which get disclosed in the next period’s financial statements.

That’s what ADM did, with the most significant revisions to the operating profits for its nutrition segment, the unit of the business that includes livestock feed and pet food. The company had stunned the market in January when it put its chief financial officer, Vikram Luthar, on leave after announcing the SEC was probing inter-segment sales between the nutrition segment and the company’s other business arms. The company launched an internal investigation and appointed an interim finance chief.

The nutrition business is the smallest of the company’s operating segments, but its performance had a big impact on executive bonuses in 2020 and 2021, Bloomberg reported in January.

The company on Tuesday shrank its previously reported operating profit in the nutrition segment by $31 million, or 7%, for the year ending 2023. It also reduced operating profits for 2022 by $68 million, or 9%, and revised the 2021 operating profit by $59 million, an 8.5% reduction. The accounting fixes won’t affect executive bonuses, the company said. ADM declined to comment for this article.

SEC Focus on Restatements

Wall Street’s top regulator pays close attention to cases where companies are perceived to sweep accounting errors under the rug without calling them out in a “Big R” restatement. SEC Chief Accountant Paul Munter in March 2022 warned companies against using stealth revisions to fix accounting mistakes if those errors could be considered relevant to investors and analysts. Companies have to consider not just the numerical materiality of mistakes, he has said in further public speeches.

New SEC rules forcing executives to pay back bonuses if earnings turn out to be erroneous put further pressure on accounting mistakes. Under the rules that went into effect in December, companies have to consider both “Big R” and “Little R” corrections when they develop executive pay clawback policies. They also have to check a box on the front of their annual financial reports indicating whether an error correction triggered such an analysis.

Given the regulator spotlight on accounting mistakes, ADM likely didn’t take the decision to do a “Little R” revision lightly, said Phil Lamoreaux, accounting professor at the W.P. Carey School of Business at Arizona State University.

“I would bet a lot of very expensive people spent a lot of time thinking about this,” Lamoreaux said, referring to attorneys and consultants. “They all knew there was going to be a lot of scrutiny when this 10-K came out.”

Regardless of how ADM corrected its numbers, its problems are nowhere near over, said Francine McKenna, accounting lecturer at the University of Miami and author of The Dig, an accounting newsletter.

The SEC and DOJ are still investigating, and the company showed signs of stress within the nutrition business unit, McKenna said, pointing to a $137 million goodwill impairment the company recorded this past quarter related to its animal nutrition line.

“At this point it’s technical semantics,” McKenna said of the debate over the type of error correction the company did. “They’ve drawn enough attention to themselves with this issue, even if they didn’t make the disclosure that they had a Big R restatement.”

Federal authorities will closely look at every company move, she said.

“They kind of cooked their own goose by putting an executive on leave and really attacking this with a massive investigation,” McKenna said. “Someone’s going to look at it more strenuously.”

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