Last Wednesday, the SEC filed a civil action against three former officers of ConAgra Agri Products Companies, a unit of ConAgra: former president and COO, James Blue, former North American operations president Randy Cook, and former controller Victor Campbell.
The trio is charged with quite a bit. The suit alleges they perpetrated fraudulent accounting practices including improper revenue recognition for deferred delivery sales and linked rebates from suppliers; omission of bad debt expenses when incurred; and flawed revenue recognition related to advance vendor rebates. Outcome: ConAgra overstated its income before income taxes by about 7.35% in 1999 and 7.85% in 2000. At the segment level, operating profit was overstated by 16.36% in fiscal 1999, and 34.97% in fiscal 2000.
All three defendants benefited from their actions by receiving bonus compensation based on the inflated earnings. The SEC’s complaint holds many details of their handiwork, but here’s an abbreviated version:
The improper revenue recognition for “deferred delivery sales” is for items sold, but not yet delivered; they were still in possession of goods at the end of the periods in question. This is the “bill and hold” revenue technique made famous by Sunbeam Corporation in the 1990’s. It can be accomplished legitimately, but it should be rare: Staff Accounting Bulletin 101 describes the conditions necessary to pull it off properly. Not so in this case - and compounding the faulty recognition, UAP received vendor rebates based on the inflated sales, which further increased revenues (wrongly).
More bad accounting: the provision for bad debts was not stoked while receivables soured . In those two years under examination, the firm avoided $35 million of bad debt expense. Even a plan to write down uncollectible receivables over five years (which is still a violation of GAAP) was rejected by the principals as being too costly to earnings. Finally, the trio was involved with negotiating rebates from vendors in advance of fulfilling the conditions for actually earning them (like selling the vendors’ products), and then recognizing them as revenue.
The unit was offloaded to Apollo Management in 2003. The Commission’s investigation continues. What’s interesting is that these machinations aren’t based on some twisted interpretation of an exceedingly complex accounting standard. No, they’re just basic blocking-and-tackling issues that had been warped into a work of financial fiction. Bad incentives may have made for bad accounting.
CAG 1-yr chart