We hear almost daily reports of companies engaging in accounting shenanigans to boost their apparent performance. As of late, companies like Diamond Foods (DMND), Green Mountain Coffee Roasters (GMCR) and Avon Products Inc. (AVP) are grabbing headlines for their alleged bad behavior.
Avon has been under the shadow of bribery allegations, in violation of the Foreign Corrupt Practices Act (FCPA), since at least 2008. The company has spent hundreds of millions of dollars conducting internal investigations, has lost at least four executives linked to bribery in China, and has been suffering from poor financial performance. And now it appears that Avon may have been aware of bribes being paid as far back as 2005, meaning the company’s problems may soon get even worse.
Diamond Foods is alleged to have reported “momentum” payments of $20 million and $60 million to almond growers in the wrong periods, effectively delaying expense recognition to boost net income. The company reported in November that it was investigating the situation, and in December Robert Willens (an expert hired by KeyBank to give an opinion on Diamond Foods) seemed to give the company an “all clear”.
However, on December 14, 2011, Diamond Foods received a formal order of investigation by the SEC, and last week the company announced that its CEO was being put on administrative leave after the audit committee determined that the payments were accounted for in the wrong periods and the financial statements would need to be restated:
“After an extensive and thorough investigation, the Audit Committee concluded that the Company’s internal controls were inadequate and that certain grower payments for the 2011 and 2010 crops were not accounted for in the correct periods. As a result, the Company will restate its fiscal years 2010 and 2011 financial statements,” said Robert Zollars, Diamond Foods’ Chairman. “The Board takes the Company’s control and the integrity of its financial statements very seriously, and we are moving aggressively to implement corrective measures, including changes to the Company’s leadership.”
Diamond Foods isn’t the only company that has been given the thumbs-up by Robert Willens. He gave the all-clear to Tyco in 2002, saying, “The accounting they employ is of very longstanding validity.” The SEC apparently disagreed with that when it brought civil charges against Tyco for improperly inflating its income by over $1 billion.
Green Mountain Coffee Roasters is another company under fire for its accounting practices. Robert Willens is again quoted, saying about GMCR that their “…accounting is not objectionable or questionable. It seems quite sound.” This, despite being investigated by the SEC, having to restate multiple years’ financials, and many legitimate concerns raised by investor David Einhorn. And the company doesn’t score too well in the Beneish Earnings Manipulation Model. Only time will tell if “expert” Robert Willens was wrong again when saying that a company’s accounting practices are good.
The types of wrongdoing that these companies are alleged to be involved in are easy to commit, but hard to find. It is simple to manipulate the financial statements, and hope no one ever gets to dig deep enough into the financial statements to find out the truth. Instances of bribery are typically well-covered, with the transactions booked in a way that makes them look like legitimate business expenses. Phony supporting documentation is easy to come by, further bolstering the company’s case that these were business expenses.
Companies (and government agencies) rely on whistleblowers to help uncover these kinds of fraud. Without someone on the inside, it is difficult to find the wrongdoing, especially since fraudsters are often so adept at covering their tracks.
A robust compliance program is necessary, and the company needs experienced people in positions of authority within the compliance realm. Internal investigations must be initiated quickly, and the need for having these investigations completed by outside, neutral third parties cannot be emphasized enough.
If we learn nothing else from Avon, Diamond Foods, and Green Mountain Coffee, we should learn this…. when the company has reason to believe laws have been violated (especially ones being pursued with a vengeance by the government, such as FCPA), action must be taken quickly and swiftly.