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ADM’s Accounting for Financial Statement Restatements Questionable

Should it be a Treated as a “Big R” or a “little r”?

Last week it was announced that Archer Daniels Midland (ADM) is under investigation by the U.S. Justice Department over its accounting practices. In January 2024, ADM placed its Chief Financial Officer, Vikram Luther, on administrative leave after the company said it was conducting an internal probe of accounting practices, following a request for documents issued by the U.S. Securities and Exchange Commission (SEC). The company corrected some past financial results over the years while reporting lower quarterly sales and a more than 40 percent drop in earnings compared with a year ago.

The accounting problems at ADM 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.

The Accounting Issues

According to Nicola White, a reporter at Bloomberg, “when it came to correcting actual numbers, however, the company went small.” The company revised three years of results for certain operating segments, a “so-called ‘Little 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.”

The SEC 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. Big R

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.

The company last week 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.

SEC Focus on Restatements

Nicola White points out that 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 must consider not just the numerical materiality of mistakes; he has said in further public speeches.

A study of restatements shows that many companies are turning away from announcing restatements in Form 8-K and have avoided amending previously issued financial statements for the periods affected. Companies are instead revising the affected numbers for the previous periods and showing them in subsequent quarterly or annual reports (little “r” restatements).6 The problem is by not including it in an 8-K filing as required in “R” restatements, the restatement does not get publicly disclosed and may mislead users into thinking nothing important has happened that would warrant restatement. It is ethically problematic to bury restatements in quarterly and annual reports rather than to have a separate filing with the SEC in the 8-K.

One consequence of having restatements is that material misstatements caused by accounting irregularities may cast doubt on managements’ integrity and expose the company to regulatory scrutiny or litigation. It is up to the audit committee to ensure that these restatements are properly disclosed and relevant adjustments to the financial statements are made. The audit committee should also discuss these matters with the external auditors.

ADM needs to take steps now to do a thorough investigation of the financial changes required, determine the materiality both in quantity and quality and make the appropriate call in deciding whether the generally accepted accounting principles require it to be treated as a Big-R or Little-r, even if it means the previous year financial statements have to be reissued, something the company wants to avoid but is the better way to report it to investors.

Posted by Steven Mintz, Ph.D., aka Ethics Sage, on March 18, 2024. You can sign up for his newsletter and learn more about his activities at: https://www.stevenmintzethics.com/.

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