ADM Accounting Probe Centers on Dubious Footnote Investors Watch

0

A probe into Archer-Daniels-Midland Co.’s accounting is aggravating investors’ long-time concerns that large, complex companies are more prone to the risk of undetected manipulation of crucial financial figures.

The Chicago-based agricultural giant has released few details since it said Sunday that it had suspended its chief financial officer and cut its earnings forecast, sending its stock tumbling 24%. A Securities and Exchange Commission request for information sparked the company’s inquiry into how it reported revenue for its nutrition business, one of three major operating divisions, including any transactions among those units that could have impacted the totals.

Corporate managers have wide latitude under US accounting rules on how to divvy up their results and set what business units charge each other for services or supplies. But shifting revenues from one operating segment to another could mislead investors, and any intentional mingling could cast doubt on the reliability of the company’s other financial reporting.

“If a segment is struggling or has come under increased scrutiny from investors, then arguably there is certain incentive that management has to prop that segment up if it would otherwise not look as good as investors would like it to look,” said Bruce Pounder, founder of GAAP Labs, an accounting advisory firm. “At its worst, the manipulability could be deliberate and thus fraudulent.”

That discretion given to corporate leaders also poses challenges for regulators and auditors who police the reporting. ADM’s auditor is Ernst & Young LLP, which has worked with the crop trader since 1930.

A spokesperson for ADM declined to comment. EY did not immediately respond to a request for comment.

Over the past decade, ADM sought to diversify its portfolio with a push into making ingredients for animal and human feed products. But expansion in the segment trailed off in the past two years from double-digit earnings growth reported in 2021.

The company’s CFO Vikram Luthar, who was placed on administrative leave, had been in the role for less than two years and previously was the CFO of ADM’s nutrition business.

Segment Disclosure

Investors often track the performance of specific operating segments whether it’s animal feed or cloud computing, said Bill Floyd, president of Floyd Analytics, an accounting analysis firm.

“Getting that breakdown was incredibly valuable to you,” Floyd said. “If they just gave you aggregate revenue, it’s hard to drill into.”

Companies also like to show stable income especially in new or high growth businesses that get more scrutiny from analysts. One way to do that is through the prices those business segments charge one another for products or shared costs, helping one segment without hurting a larger or more established branch of the company.

Some companies report their segments by geographic location, such as McDonald’s Corp., which divides its segments based on where in the world it sells burgers. Others, like Walt Disney Co., define their segments by business line, such as media and film in one segment and theme parks in another.

Companies have long resisted the now almost 50-year-old accounting requirements, concerned about providing too many details to competitors or hampering their ability to manage earnings. That pushback also can create headaches for auditors, who have no outside customer or entity to check the numbers against.

Unlike topline revenue, which is reported on the face of the income statement, segment revenues are reported in a footnote tucked into the reams of disclosures that follow the financial statements and may not receive the same level of scrutiny.

The subjective nature of segment reporting also makes SEC enforcement difficult, said Tom Selling, a retired consultant and former academic fellow in the commission’s Office of the Chief Accountant.

“There’s very rarely a smoking gun,” Selling said.

New Rules, Expanded Reporting

For years, companies only had to report profits or losses within each segment. Under a Financial Accounting Standards Board update that goes into effect in 2025, companies must break down further details about expenses in their segments, such as payroll or costs of goods sold.

The updated rules, part of Generally Accepted Accounting Principles, promise to arm analysts with more details, but they won’t address the underlying quality of the reporting, Pounder said.

“Nobody out there who wants that information is happy with what they’re getting under existing and now new GAAP around segment disclosures,” he said.

With assistance from Nicola M. White

link

Leave a Reply

Your email address will not be published. Required fields are marked *