Monsanto To Pay $80 Million – SEC Notes Importance Of Robust Accounting Compliance Systems
By: James W. Kraus
On Tuesday, the SEC announced that Monsanto Company had agreed to pay an $80 million penalty for accounting violations relating to its rebate program with retailers and distributors of its Round-Up Pesticide product. The SEC also announced that three accounting and sales executives agreed to pay individual penalties to settle charges against each of them.
According to the government, Monsanto offered rebates to retailers and distributors of Round-Up after generic competition had undercut its prices and caused a significant loss of market share to the company. While Monsanto booked substantial amounts of revenue resulting from the rebate programs, it failed to recognize all of the related program costs at the same time. The SEC concluded that Monsanto had materially misstated its consolidated earnings in corporate filings during a three-year period.
According to the SEC, Monsanto first ran afoul of accounting rules when, in 2009, it promised retailers and distributors the opportunity to participate in a new rebate program in 2010 if they “maximized” their Round-Up purchases in the fourth quarter of 2009. Because the promise of participation in the 2010 rebate program was intended to incentivize sales in 2009, the company was required to record in 2009 a portion of Monsanto’s costs related to the program. Monsanto, however, improperly delayed recording those costs until 2010.
Monsanto also created a new rebate program for distributors who had failed to meet volume targets in 2009 whereby they could “earn back” rebates they failed to attain in 2009 by meeting new targets in 2010. That new program resulted in Monsanto paying $44.5 million in rebates to its largest two distributors as part of side agreements reached late in fiscal year 2009. Under those side agreements, the distributors would be paid the maximum rebate announced regardless of target performance. Again, because the side agreements were reached in 2009, Monsanto was required to report those rebates in 2009. The company improperly deferred recording the rebate costs until 2010. Monsanto repeated this process with a program in 2010 but improperly accounting for the $48 million in rebate costs in 2011.
According to Scott W. Friestad, Associate Director in the SEC’s Division of Enforcement, the overall result of Monsanto’s actions was that it resulted in the “booking of substantial amounts of revenue without the recognition of associated costs.” Mr. Friestad offered this comment regarding the importance of appropriate accounting compliance systems: “Public companies need to have robust systems in place to insure that all of their transactions are recognized in the correct reporting period.”
Two accounting executives, Sara M. Brunnquell and Anthony P. Hartke, as well as sales executive, Jonathan W. Nienas, will pay penalties of $55,000, $50,000 and $30,000 respectively. Both accountants, Brunnquell and Hartke, agreed to be suspended from appearing and practicing before the SEC as accountants. Brunnquell can apply for reinstatement after two years and Hartke can apply for reinstatement after one year. Monsanto, as well as the three individuals, entered into the agreed order without admitting or denying the findings.
The SEC announced that it did not find any personal misconduct by Monsanto’s CEO Hugh Grant and former CEO Carl Casale, who reimbursed the company $3,165,852 and $728,843 respectively for cash bonuses and stock awards they received during the period when the company committed the accounting violations. As a result, it was not necessary for the SEC to pursue a claw-back action under §304 of the Sarbanes-Oxley Act.
A copy of the Order can be found here.