Archer-Daniels-Midland’s vertically integrated structure helps it compete – but may have gotten the company into accounting trouble. After news of SEC, DOJ and internal investigations wiped out nearly a quarter of the company’s value, the board may face tough questions at its upcoming AGM.
With thousands of companies holding AGMs during proxy season, it’s hard to know where to start. Glass Lewis’ Controversy Alert service can help, identifying the most crucial meetings globally and allowing investors to make better informed voting decisions with the latest information in hand.
In this post, we provide a roundup of the AGMs taking place this week that were previously highlighted by Controversy Alerts, and look deeper into the situation at Archer-Daniels-Midland. To get alerted ahead of time, get in touch and sign up for Glass Lewis’ Controversy Alert service.
Controversy Alerts May 20 — May 24, 2024
May 22 Amazon.com, Inc.; Controversy Alert issued May 8
May 22 PT Waskita Karya Persero Terbuka; issued May 1
May 23 Archer-Daniels-Midland Company; issued May 8
May 24 TotalEnergies SE; issued May 13
May 23 Karoon Energy Limited; issued May 13
Deep Dive: Archer-Daniels-Midland Company
Financial reporting errors can create serious problems for public companies, their boards and their owners – and over the past several years, accounting concerns have been increasing amongst U.S. public companies. This puts audit committees, which play an integral role in overseeing the financial reporting process, under the spotlight at the same time their role is evolving to include oversight of risk management, cybersecurity, ESG, and other emerging topics.
Take Archer-Daniels-Midland, the food processing and commodities trading multinational. Over the past year, the company has received voluntary document requests from the SEC and Department of Justice relating to intersegment sales between its nutrition and ag services/oilseeds/carbohydrate solutions reporting segments, covering financial statements from 2018 to 2023. The DOJ has also directed grand jury subpoenas to certain current and former employees.
On January 21, 2024, ADM announced that an internal investigation, conducted by outside counsel and the board’s audit committee, regarding accounting practices and procedures with respect to the nutrition reporting segment, including certain intersegment transactions. The company also announced that Vikram Luthar, the Company’s senior vice president and CFO, had been placed on administrative leave, with Ismael Roig appointed to serve as interim CFO, in addition to his positions as president of EMEA and president of animal nutrition. It was later confirmed that Mr. Luthar will resign in September.
News of the investigation led to a 24% decline in the company’s share price, representing a loss of more than $8.8 billion in shareholder value and the company’s worst stock performance going back to 1972.
ADM has historically disclosed that intersegment sales have been recorded at amounts approximating market. However, in connection with the investigation, it identified certain intersegment sales that were not recorded at amounts approximating market. Specifically, the company had overstated the Nutrition segment’s annual operating profit by as much as 9.2% in that time. The company subsequently noted that because the intersegment sales occurred between reporting segments, the adjustments have no impact on its consolidated balance sheets and statements of earnings, comprehensive income (loss), or cash flows. In addition, the company determined that the adjustments are not material to the consolidated financial statements taken as a whole for any period.
Nonetheless, the company disclosed that its internal controls over financial reporting were not effective as of December 31, 2023, as a result of a material weakness identified in its accounting controls and procedures related to the absence of adequate controls with respect to the reporting of intersegment sales impacted the accuracy of segment disclosures and review controls over key inputs and assumptions utilized when performing goodwill and long-lived asset impairment tests.
The company has developed a remediation plan, which includes: (i) enhancing its accounting policies with respect to the measurement of intersegment sales; (ii) improving and documenting pricing guidelines for intersegment sales; (iii) enhancing the design and documentation of the execution of pricing and measurement controls for segment disclosure purposes and projected financial information used in impairment analyses; and (iv) increasing training for relevant personnel on the measurement of and application of relevant accounting guidance to intersegment sales.
Although a putative investor class action lawsuit based on allegations of misleading and deceptive statements has already been filed, with the DOJ and SEC investigations still ongoing it would be somewhat surprising for ADM’s audit committee to face significant voting opposition as a result of this issue, at least at this year’s AGM. When a corporate issuer discloses a material weakness, investors typically give the board a one-year grace period to implement a remediation plan and resolve the situation. Nonetheless, in the meantime it is likely to be the subject of some pointed questions.
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