The Securities and Exchange Commission said Tuesday that St. Louis-based agribusiness Monsanto Company has agreed to pay an $80 million penalty and retain an independent compliance consultant to settle charges that it violated accounting rules and misstated company earnings pertaining to its flagship product Roundup.
Three accounting and sales executives also agreed to pay penalties to settle charges against them.
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.
“Financial reporting and disclosure cases continue to be a high priority for the Commission and these charges show that corporations must be truthful in their earnings releases to investors and have sufficient internal accounting controls in place to prevent misleading statements,” said SEC Chair Mary Jo White. “This type of conduct, which fails to recognize expenses associated with rebates for a flagship product in the period in which they occurred, is the latest page from a well-worn playbook of accounting misstatements.”
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.
“Improper revenue and expense recognition practices that obscure a company's true financial results have long been a focus of the Commission,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement. “We are committed to vigorously pursuing and punishing corporate executives and other individuals whose actions contribute to the filing of inaccurate financial statements and other securities law violations.”
According to the SEC’s order instituting a settled administrative proceeding against Monsanto, accounting executives Sara M. Brunnquell and Anthony P. Hartke, and then-sales executive Jonathan W. Nienas, Monsanto’s sales force 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. Hartke 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, and Brunnquell approved the talking points, according to the SEC. Approximately one-third of Monsanto’s U.S. sales of Roundup for the year occurred during that quarter.
The SEC contended that Brunnquell and Hartke, both CPAs, knew or should have known that the sales force used this new rebate program to incentivize sales in 2009 and 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 Nienas, 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.
Scott W. Friestad, associate director in the SEC’s Division of Enforcement, said, “Monsanto devised rebate programs that elevated form over substance, which led to the booking of substantial amounts of revenue without the recognition of associated costs. Public companies need to have robust systems in place to ensure that all of their transactions are recognized in the correct reporting period.”
Monsanto consented to the SEC’s order without admitting or denying the findings that it violated the securities laws. Brunnquell, Hartke and Nienas also consented to the order without admitting or denying the findings that they violated Rule 13b2-1 and caused Monsanto’s violations of various provisions.
Monsanto said it cooperated with the SEC settlement. “Monsanto first disclosed the investigation in 2011 and fully cooperated with the SEC during its investigation,” said spokesperson Sara Miller in an email to Accounting Today. “In settling, the company neither admitted nor denied the SEC’s allegations. We believe that the agreement is in the best interest of our shareowners, customers and employees as it fully concludes the matter and avoids continued distraction over an accounting matter that was resolved years ago. We have taken this matter very seriously and quickly moved in November 2011 to restate our financial statements for fiscal year 2009 through the third quarter of fiscal year 2011, following an independent review of our accruals for customer incentive programs. 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. If they decide to purchase our seeds we ask them to use them legally—no different than what the software industry does. We have agreements with around 275,000 U.S. farmers and have had legal problems with only a handful each year. We feel it’s important that these contracts are enforced uniformly, to ensure that all of our customers are treated equally and fairly. 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. In fact, we have had a long-standing and very public commitment that we would never do this.”
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. Again, no regulatory agency in the world considers glyphosate a carcinogen.”
Nienas also was found to have violated the securities laws. Brunnquell, Nienas and Hartke agreed to pay penalties of $55,000, $50,000 and $30,000 respectively, and Brunnquell and Hartke agreed to be suspended from appearing and practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies. The SEC’s order permits Brunnquell to apply for reinstatement after two years, and Hartke is permitted to apply for reinstatement after one year.
The SEC’s investigation found no personal misconduct by Monsanto CEO Hugh Grant and former CFO Carl Casale, 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.