Monsanto, the multinational agriculture company headquartered in the St. Louis area, has agreed to pay the Securities & Exchange Commission an $80 million penalty and retain an independent compliance consultant to resolve charges it misstated company earnings and violated accounting rules.
The improper accounting centered around Roundup, an herbicide widely used by both farmers and homeowners to keep weeds from growing. Because of insufficient accounting controls, the company materially misstated its earnings for a three year period as the company incentives sales without appropriately recognizing the costs of the program.
According to the SEC Order, Monsanto encouraged distributors to maximize fourth quarter sales in 2009 in order to participate in a new rebate program in 2010. It also offered distributors the opportunity to earn rebates they failed to qualify for in 2009 during 2010. Separately, the company also agreed to pay rebates to its two largest distributors regardless of target performance. The costs of some of these rebates should have been recorded in 2009 in order to appropriately match up the expenses to the sales. Monsanto then repeated the rebate program in 2010.
In three countries in 2010 and 2011, Monsanto improperly accounted for more than $50 million in rebates and booking them as selling, general and administrative (SG&A) expenses rather than rebates. This improper expense recognition boosted gross profits in those countries.
Three individuals (two accounting executives and a sales executive) agreed to pay penalties of between $30,000 and $55,000. The CEO and former CFO agreed to reimburse the company for cash bonuses and certain stock awards during the time the company was violating the accounting standards, which made the SEC’s pursuit of a clawback action under the Sarbanes-Oxley Act unnecessary. The SEC press release indicated it found no personal misconduct by these two individuals.
In the press release accompanying the Order, SEC Chair Mary Jo White emphasized the “high priority” given to financial reporting and disclosure cases like this one. The SEC Director of the Division of Enforcement, Andrew Ceresney, also emphasized the SEC’s focus and vigorous pursuit of these kinds of cases. Specifically, he said that improper revenue and expense recognition has “long been a focus of the Commission.”
The securities regulator’s emphasis on this type of case makes it an appropriate one for filing SEC whistleblower tips when a company is engaged in corporate wrongdoing that materially misstates its revenue and accounting statements to investors in financial filings. If the recession that is forecasted by the stock market and investors begins putting more pressure on companies to meet financial earnings in order to avoid a drop in their share price, we may see more incidents like this one which took place as the economy exited the Global Recession.
Update: A New York firm told Accounting Today that it represents the SEC whistleblower who brought this information to the SEC after the Dodd-Frank Act was signed into law. The firm did not say whether the individual was an accountant but did identify the individual as an insider at Monsanto. It is not yet clear whether the individual will be entitled to a reward but if the informant receives a monetary reward, it will likely be one of the top awards to date. With an estimated range of between $8 and $24 million, it will be somewhere between the second and fourth highest award issued by the securities regulator.
The largest award was issued to an international whistleblower for $30 million in September 2014.