Monsanto is in the news for the wrong reasons. The Securities and Exchange Commission (SEC) has imposed a penalty of $80 mn on Monsanto for accounting violations made in 2009 and 2010. Not only that, three accounting and sales executives of the firm also agreed to pay penalties to settle charges against them. Early last year, Blackrock Inc. was penalized by the SEC to the tune of $12 mn for failing to disclose a conflict of interest. Here too, the SEC faulted the company’s Chief Compliance Officer for breach of his duties.
Such cases hint towards Compliance transforming to Enterprise Risk Management and stress on the importance of following the right accounting policies every single time.
The facts of the case
In 2009, Monsanto had initiated an incentive program by which its distributors were entitled to get huge rebates on sales of one of its flagship products (Roundup). Monsanto’s revenues increased with this program. But while the Company accounted for the revenues earned in the appropriate years, the cost attributed to the rebate program (disclosed as a reduction to the revenue numbers) were not accounted in the same years as the revenues. This led to a material misstatement of income.
To put things in perspective, I have pulled out the relevant numbers from IRIS' iConnect (an excel add-in for global data analysis) to see the extent of misstatement pertaining to the above incentive program and here is what it looks like:
Total Revenues (As reported originally)
Revenues from ‘Roundup’ (As reported originally)
Impact of Costs attributed to rebate program
$ in mn
$ in mn
$ in mn
Monsanto had overstated revenues by $ 44.5 mn, as it had not recorded the cost attributed to the rebate program in 2009 (originally recorded as a reduction in revenue in fiscal year 2010)
Monsanto had overstated revenues by $ 48 mn, as it had not recorded the cost attributed to the rebate program in 2010 (originally recorded as a reduction in revenue in fiscal year 2011). Also, it had understated the revenues by $ 44 mn (presumably rounded off), as it had accounted the cost (that should have ideally been accounted in 2009) in 2010. Hence, the net effect is an overstatement of $ 4 mn.
Monsanto has stated in its last 10K that it has already provided for the above penalty in its financial statements. This may be the reason why the stock markets did not react to the above development, quite unlike the Valeant Pharmaceuticals story that had taken the company’s stock price on a roller coaster ride. We covered the story here.
In the current case, the amount of misstatement does not seem significant (it is 0.38% and 0.038% of total revenues for 2009 and 2010 respectively). But the very fact that the SEC has slapped an $80 mn fine on Monsanto makes it significant, thereby re-emphasizing the fact that deviation from accounting procedures paves the way for penalties irrespective of the amount of mis-statement. With SEC getting stricter day by day on regulatory norms, firms need to be scrupulously meticulous about their quality of compliance reporting.
For more such analysis using your own spreadsheets contact me at firstname.lastname@example.org