![]() ![]() Under the “clawback” provision of the Sarbanes-Oxley Act of 2002, executives are required to pay back compensation during periods when accounting misstatements occurred, even if the executive was not directly engaged in the misconduct. It is not surprising or unusual for CEOs to pay back their incentive compensation if the company has accounting related misreporting. Monsanto’s CEO, Hugh Grant, reimbursed the company $3,165,852 for cash bonuses and stock awards received during the period. Based on the review, the company disclosed that it was going to restate its earnings from 2009 to 2011. Monsanto neither admitting nor denied any wrongdoing but agreed to hire a consultant to review its financial reporting of the rebate programs. ![]() The SEC found that two certified public accountants (CPAs) at Monsanto either knew or should have known that Monsanto was improperly documenting costs tied to the program and were suspended from practicing as accountants of public companies. In addition to the company fine of $80 million, three Monsanto accounting and sales executives agreed to pay penalties to settle individual charges against them. The company possibly deferred recognizing the rebate costs to future periods when cash was being paid which violated the matching principle and the fundamental “accrual” notion of accounting. ![]() Because the rebate contributed to the sale of Roundup for the current period, the company is required to include rebate estimates in the current period. The accounting problem was that Monsanto was recognizing revenues from the sale of Roundup but it failed to include an estimate of the cost of the rebate that would be paid to its retailers/distributors in future periods. In 2010 alone, Monsanto paid $44.5 million to its two largest distributors as a rebate for meeting the sales goals of Roundup for its past rebate programs. Under the program, the company would offer steep price reductions on the product, or pay a rebate on the product in subsequent years, if retailers and distributors met certain sales goals. Because of intense competition from generic products, and possibly facing the prospect of a sharp decline in profits, Monsanto introduced an aggressive rebate program from 2009. One of Monsanto’s flagship and highly profitable products is a weed-killer herbicide named Roundup. It is one of the largest accounting-related settlements by the SEC since Mary Jo White took over as the Chair of the Commission in 2013. The Securities and Exchange Commission (SEC), the Robocop patrolling Wall Street and the guardian angel of the average investor, charged Monsanto of misstating earnings because the company failed to properly account for the costs of sales associated with its flagship herbicide product “Roundup.” Monsanto agreed to pay $80 million in penalties. The company was eager to recognize revenues but not the costs associated with generating revenues. It violated the most fundamental accounting rule-the matching principle. Monsanto, a large multinational agricultural public company, did exactly what it was not supposed to do. Under US GAAP, companies are required to “match” revenues with costs in the same period so that current earnings are an accurate predictor of economic income. This indicates the accounting period is the month (June), although the entity may also wish to aggregate accounting data by quarter (April through June), half year (January through June), or an entire fiscal year.Companies have incentives to recognize revenues but not the costs associated with generating those revenues because doing so allows them to report inflated income for the current period. For example, assume the accounting department of XYZ Company is closing the financial records for the month of June. There are typically multiple accounting periods currently active at any given point in time.
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