Monsanto Rounds Up $80 Million in Accounting Violations

ST. LOUIS (FEBRUARY 9, 2016)

BY MICHAEL COHN, Accounting today

The Securities and Exchange Commission said Tuesday that St. Louis-based agribusiness Monsanto Company has agreed to pay an $80 million penalty ….. to settle charges that it violated accounting rules and misstated company earnings pertaining to its flagship product Roundup.

An SEC investigation found Monsanto had insufficient internal accounting controls to properly account for millions of dollars in rebates offered to retailers and distributors of its herbicide Roundup after generic competition had undercut Monsanto’s prices and resulted in a significant loss of market share for Roundup. Monsanto booked substantial amounts of revenue resulting from sales incentivized by the rebate programs, but failed to recognize all of the related program costs at the same time. Therefore, Monsanto materially misstated its consolidated earnings in corporate filings during a three-year period….

The agribusiness giant has attracted controversy over the years for pressuring farms to buy its Roundup-resistant seeds every year and suing them if they re-use the seeds. The company has even sued farms where Roundup-resistant crops were found to be growing because the genetically modified seeds had blown over from neighboring farms. Monsanto has also faced lawsuits of its own for hiding the carcinogenic effects of a key ingredient in Roundup. Accounting violations are a relatively new area for Monsanto, however…

According to the SEC’s order instituting a settled administrative proceeding against Monsanto, accounting executives … and sales executives…began telling U.S. retailers in 2009 that if they “maximized” their Roundup purchases in the fourth quarter they could participate in a new rebate program in 2010. Executives developed talking points for Monsanto’s sales force to use when encouraging retailers to take advantage of the new rebate program and purchase significant amounts of Roundup in the fourth quarter of the company’s 2009 fiscal year….Approximately one-third of Monsanto’s U.S. sales of Roundup for the year occurred during that quarter.

The SEC contended that … U.S. GAAP required the company to record in 2009 a portion of Monsanto’s costs related to the rebate program, but Monsanto improperly delayed recording these costs until 2010.

Monsanto also offered rebates to distributors who met agreed-upon volume targets. However, late in the fiscal year, Monsanto reversed approximately $57.3 million of rebate costs that had been accrued under these agreements because certain distributors did not achieve their volume targets (at the urging of Monsanto). Monsanto then created a new rebate program to allow distributors to “earn back” the rebates they failed to attain in 2009 by meeting new targets in 2010. Under this new program, Monsanto paid $44.5 million in rebates to its two largest distributors as part of side agreements arranged by management, in which they were promised late in fiscal year 2009 that they would be paid the maximum rebate amounts regardless of target performance. Because the side agreements were reached in 2009, Monsanto was required under GAAP to record these rebates in 2009. But the company improperly deferred recording the rebate costs until 2010.

Monsanto repeated the program the following year and improperly accounted for $48 million in rebate costs in 2011 that should have been recorded in 2010, according to the SEC. Monsanto also improperly accounted for more than $56 million in rebates in 2010 and 2011 in Canada, France and Germany. They were booked as selling, general and administrative expenses rather than rebates, which boosted gross profits from Roundup in those countries…..

Monsanto said it cooperated with the SEC settlement…” (It) neither admitted nor denied the SEC’s allegations. Today’s announced settlement does not require any changes to the company’s historical financial statements due to our proactive efforts to restate our financials for the period at the center of the SEC’s investigation.”

She pointed out that that the $80 million civil penalty was fully reserved for and previously disclosed in the company’s financial statements for fiscal year 2015.

Miller also objected to how Monsanto has been characterized. “We do not pressure farmers into buying our products. Farmers have lots of choices and we must earn their business every year….. Additionally, Monsanto has never sued a farmer when trace amounts of our patented seeds or traits were present in the farmer’s field as an accident or as a result of inadvertent means. …

Despite lawsuits against Monsanto over its ingredients, Miller contended that glyphosate (a key ingredient in Roundup) does not cause cancer. “Glyphosate is a vital tool for agriculture with a more than 40-year history of safe use,” she said. “Glyphosate has been the subject of hundreds of detailed health and safety studies – making it one of the most thoroughly studied herbicides on the market….”

…(Executives) agreed to pay penalties of $55,000, $50,000 and $30,000 respectively, and agreed to be suspended from appearing and practicing before the SEC as an accountant (for a period of time)….

The SEC’s investigation found no personal misconduct by Monsanto CEO …who reimbursed the company $3,165,852 and $728,843, respectively, for cash bonuses and certain stock awards they received during the period when the company committed accounting violations. Therefore, it wasn’t necessary for the SEC to pursue a clawback action under Section 304 of the Sarbanes-Oxley Act.

1)     Audit theory says that the risk of material misstatement is a component of inherent risk and control risk. Assume you are the auditor for Monsanto for 2009. Discuss ways in which the auditors could have been become aware of inherent risks of material misstatement during the planning stage. Identify key inherent risks as evidenced in the reading.

2)     What accounts (based on what is described in the narrative) are over or understated? Where do the accounts fit within the scope of these accounting elements – current assets, long-term assets, current liabilities, long-term liabilities, contributed capital, accumulated other comprehensive income and retained earnings?   Indicate the account, its position in the elements, whether or not it is over or understated, and discuss the specific financial statement assertion violated.

3)     Discuss what happened in terms of the fraud triangle.

4)     What do you think about the PCAOB’s role in this matter?

Presented below is the comparative balance sheet for Martinez Company.

Prepare a comparative balance sheet of Martinez Company showing the percent each item is of the total assets or total liabilities and stockholders’ equity. (Round percentages to 2 decimal places, e.g. 2.25%.)

Blooms Enterprise Project

Blooms Enterprise is a retail company that sells household electronics. The budget for the forthcoming period January to March 2021 is to be prepared. Expectations for the forthcoming period include the following:

1. Expected Statement of Financial Position as at 31 December 2020

2. Sales data – the company’s sales for December 2020 are expected to be $900,000 and it is expected that it will increase by 10% each month over the previous month for the quarter ending March 31, 2021. Sales are expected to remain constant at March 31, 2021 level for the next three months.

3. Collections – credit sales are typically 70% of total sales. Outstanding amounts from sales are normally collected as follows:

1. 80% during the month of sale
2. 20% during the month after sale

4. Cost of goods sold – this is normally 70% of total sales. To have adequate stocks of inventory on hand, the company attempts to have inventory at the end of each month equal to half (50%) of the next month’s projected cost of goods sold. Inventory is purchased on account and usually settled as follows:

1. 40% during the month of purchase
2. 60% during the month after purchase

5. Other monthly expenses:

6. Equipment is to be purchased on January 1, 2021 for cash in the amount of $700,000.

7. The directors have indicated an intention to declare and pay dividends of $120,000 on the last day of each quarter.

8. The executives believe that the company should maintain a minimum cash balance of $60,000. If the cash balance in any month is less than $60,000, then the company can borrow to cover the shortfall. Amounts borrowed must be in multiples of $1,000 (for example, $50,000 or $51,000 but not $51,500 or 51,566). The interest rate is 10% per annum. Repayment of principal and interest must be made on the last day of each quarter.

1. Tax payable represents 20% of Profit before Tax and will be paid April 30, 2021 (after the end of the first quarter).

Required:

Prepare the following budgets for Blooms Enterprise by month and the quarter in total for the period ending March 31, 2021:

1. Schedule showing breakdown of sales between cash and credit (Hint: show December 2020 and April 2021 as well).                                                                            

2. Schedule of cash collected from customers.                                                              

3. Purchases budget (Hint: show April 2021 as well).                                            

4. Schedule of cash disbursement to suppliers of products for resale.                        

5. Cash budget for the period.                                                                               

Blooms Enterprise is a retail company that sells household electronics. The budget for the forthcoming period January to March 2021 is to be prepared. Expectations for the forthcoming period include the following:

a.      Expected Statement of Financial Position as at 31 December 2020

b.     Sales data – the company’s sales for December 2020 are expected to be $900,000 and it is expected that it will increase by 10% each month over the previous month for the quarter ending March 31, 2021. Sales are expected to remain constant at March 31, 2021 level for the next three months.

c.      Collections – credit sales are typically 70% of total sales. Outstanding amounts from sales are normally collected as follows:

                 i.          80% during the month of sale

               ii.          20% during the month after sale

d.     Cost of goods sold – this is normally 70% of total sales. To have adequate stocks of inventory on hand, the company attempts to have inventory at the end of each month equal to half (50%) of the next month’s projected cost of goods sold. Inventory is purchased on account and usually settled as follows:

                  i.          40% during the month of purchase

                ii.          60% during the month after purchase

e.      Other monthly expenses:

f.      Equipment is to be purchased on January 1, 2021 for cash in the amount of $700,000.

g.     The directors have indicated an intention to declare and pay dividends of $120,000 on the last day of each quarter.

h.      The executives believe that the company should maintain a minimum cash balance of $60,000. If the cash balance in any month is less than $60,000, then the company can borrow to cover the shortfall. Amounts borrowed must be in multiples of $1,000 (for example, $50,000 or $51,000 but not $51,500 or 51,566). The interest rate is 10% per annum. Repayment of principal and interest must be made on the last day of each quarter.

i.       Tax payable represents 20% of Profit before Tax and will be paid April 30, 2021 (after the end of the first quarter).

Required:

Prepare the following budgets for Blooms Enterprise by month and the quarter in total for the period ending March 31, 2021:

(a)    Schedule showing breakdown of sales between cash and credit (Hint: show December 2020 and April 2021 as well).                                                                             

(b)    Schedule of cash collected from customers.                                                              

(c)    Purchases budget (Hint: show April 2021 as well).                                             

(d)    Schedule of cash disbursement to suppliers of products for resale.                         

(e)    Cash budget for the period.                                                                                

Jade MacIntire is a famous singer. Jade Aquarium, Inc. isa multimedia company with business interests in music, videos, and video games. Both Jade MacIntire and Jade Aquarium need help booking the licensing agreements they have entered into during the past year. They entered into the following licensing agreements: 1) In January, Jade Aquarium, Inc.purchased the intellectual property rights to the music created by Jade MacIntire to date of the contract, for $20,000. Under the terms of the contract has additionally acquired the right to purchase future compositions created and sung by the artist, for $500 per composition, within five-years from the date of the contract. The corporation can legally sell to another party the compositions it has purchased from the artist. 2) This year, Jade MacIntire has entered into an agreement with the producers of a Broadway musical, giving them the exclusive right to use a song that she wrote,for a $10,000 consideration. It is not a song Jade MacIntire willever personally perform. 3) Jade Aquarium, Inc. has also entered into a licensing agreement with a movie company allowing it to use two of the artist’s most popular compositions in future movies over the next two years. The movie company paid $2,000 for the option to use the songs and will pay an additional $1,500 each time the songs are used in a movie. It is expected that the use of the songs in the movies willbolster the artist’s popularity, increasing the demand for her albums. 4) Jade Aquarium, Inc. also collects royalties for songs written by Jade MacIntire and played on air. On average the company collects for 3500 song plays each month. Each play earns the company 9.1 cents in royalties. 5) Jade Aquarium produced a guitar music app that individuals can download for $2.99, with20,000 apps downloaded this year. The app is fully functional, but the company anticipates needing to provide software updates twice a year for the next five year; these costs are expected to equal $3,000 and are considered immaterial to the total app developmental cost of $60,000. 6) At the end of June, Jade MacIntire sold the rights to the use of her album cover images for t-shirts and mugs to Music Outfitters-R-Us for two years. Music Outfitters-R-Us paid Jade MacIntire $20,000 for the rights. Music Outfitters-R-Us has offered Jade a bonus of $10,000 if Jade MacIntire averages at least 50 shows per year over the next two years and $5,000 if Jade MacIntire averages at least 40 shows per year over the next two years. By the end of the year, Jade MacIntire had performed 50 shows. The probability of Jade MacIntire playing 20-29 shows next year is 15%, 30-39 shows next year is 25%, 40-49 shows next year is 30%, 50+ shows next year is 30%. Case Questions 1) Summarize the issues specifically related to accounting that are in this case. 2) Providing relevant support from the FASB Codification, discuss the proper accounting treatment for the revenue generating activities. More specifically, at what point(s) in time should revenue be recognized, and for what amount(s)? 3) Find, cite, and summarize the relevant international accounting standard applicable to this case. Compare and contrast relevant U.S. GAAP and IFRS standards.

After having initially started out in 1988 as a reseller of third party software to small distribution businesses and corporate systems for retail home offices, by 1993 Datavantage grew to 16 employees and $1.5 million in sales with only $50,000 of external financing. Very few products were developed internally and, by 1993, Datavantage was slowly transforming itself into a consulting company. Despite relative success, it wasn’t exactly what Marvin envisioned to be an exciting entrepreneurial opportunity and he was ready to get out of the business. A radical change was needed in order for Marvin to consider staying and growing the company.

The opportunity for change arrived in 1994 when Datavantage acquired the services division of LDI, with Chaz joining Datavantage as part of this acquisition. LDI was a reseller of products for store systems and provided a complementary foundation for Datavantage’s further development. This dramatically changed Marvin’s perception of Datavantage’s future potential.

Also in 1994, the organization made a conscious decision to better control its own destiny and transition away from reselling third party software and into internally developing its own Point of Sale software products. After developing Store 21, a complete store management system based on full transaction Point of Sale (POS) applications software, Chaz and Marvin were considering the acquisition of XBR Track, a small loss prevention software company, based in Boston, Massachusetts.

The opportunity for XBR Track emerged out of the need of Specialty Retailers to minimize their internal losses from theft and shrinkage. Chaz and Marvin determined that retailers in the U.S. were losing an average of 2 percent of sales due to retail theft or shrinkage each year. The losses due to shrinkage directly affect the bottom line of the retailer in the form of a pure profit loss. It was estimated that retail employees account for 55 percent to 75 percent of lost revenue because of various fraudulent transactions. Transaction fraud ranges from improper cash refunds and price overrides to employee discount abuse and fraudulent credit card activity. XBR Track was offering the retail industry a solution to the $13.2 billion loses annually due to employee theft.

Chaz and Marvin find themselves in the final stages of negotiation to acquire XBR discussing many related issues regarding the acquisition and its impact on the entrepreneurial culture currently at the company. While there is no doubt about the attractiveness of the acquisition, the case brings up multiple concerns about the post-acquisition integration directly relating them to the challenge of continuing the organizational entrepreneurial culture. Specifically, the two founders are concerned with whether Datavantage will be able to successfully serve the existing customers and maintain its current level of customer support; whether XBR’s geographical location will become an issue during the integration; whether the existing sales force has enough knowledge and competency to sell XBR; and whether Datavantage will be able to effectively execute the “get into the castle” strategy intended for XBR. Above all, however, Chaz and Marvin were wondering if the potential rapid growth that XBR can provide for Datavantage can have a negative impact on the small start-up entrepreneurial culture that made the company successful.

1. There are many reasons for the growth success of the company for its current (at the time of the case) growth. What does the case describe as the main reason? Hint: it has to with entrepreneurship.
2. What are the aspects of the company’s performance that are directly affected by these factors? Identify what aspects of the company’s performance are directly affected by its ability to sustain and nurture its entrepreneurial culture. What are the 3 areas that ensured the company’s success?

Staples’ statement of cash flows reports expenditures for acquisition of businesses. It also reports additions to long-term debt. Suppose the businesses had been acquired not with cash, but by exchange for debt securities. Would such a transaction be reported? Explain.

Prove that equation have a unique solution through the point (0,1). With the knowledge acquired can you exhibit explicitly that unique solution for a and b?

(a) y' = y - y^2

(b) y' = y^2 - y^3

What do you think would happen if an Asiatic Streptococcus strain acquired genetic information from a European Streptococcus by means of a plasmid, integrated it into a CRISPR array, and then was shipped on a load of “active culture” Yak milk to London?