[SOLVED] Monsanto is an agricultural seed and chemical

Monsanto is an agricultural seed and chemical company that manufactures and sells glyphosate, an herbicide, under the trade name “Roundup.” Roundup historically was one of Monsanto’s most profitable products, and the company sells it to both retailers and distributors. After the patent expired in 2000, competition from generic products began to erode Monsanto’s profit margins. By fiscal year 2009, generic competitors were undercutting Monsanto’s prices in the U.S. and Canada by more than 70 percent. Monsanto was losing share in these markets as customers – concerned they could not profitably sell high-priced Roundup – shifted their purchases to generic brands. By the end of fiscal 2009, Monsanto had lost more than half of its share of the glyphosate market (dropping from 55 percent market share to less than 25 percent).
During fiscal years ended August 31 of 2009, 2010, and 2011, Monsanto improperly accounted for millions of dollars of rebates offered to Roundup distributors and retailers in the U.S. and Canada to incentivize them to purchase Roundup. Monsanto also improperly accounted for rebate payments to Roundup customers in Canada, France, and Germany as selling, general, and administrative expenses (“SG&A”) rather than rebates, which boosted Roundup gross profit in those countries. Monsanto did not have sufficient internal accounting controls to identify and properly account for rebate payments promised to customers.
As a result, Monsanto materially misstated its consolidated earnings and its revenues and earnings for its Roundup business lines in its periodic reports filed with the SEC for fiscal years 2009, 2010, and 2011. As a result of the improper accounting, Monsanto met consensus earnings-per-share analyst estimates for fiscal year 2009.
On November 14, 2011, Monsanto restated its 2009 and 2010 annual reports on Form 10-K and its 2011 quarterly reports on Form 10-Q (collectively “the Restatement”).
As a result of the action of Monsanto and top managers, the company violated reporting provisions of Securities and Exchange Acts, the books and records provisions, and the internal accounting control provisions of Exchange Act Section 13(b)(2)(B).
Monsanto agreed to pay an $80 million penalty and retain an independent consultant to settle charges that it violated accounting rules and misstated company earnings as it pertained to its flagship product Roundup. Three accounting and sales executives also agreed to pay penalties to settle charges against them.
Cast of Characters
Sara M. Brunnquell was the External Reporting Lead at Monsanto from April 2009 through October 2015. In that capacity, she reported to the Controller of Monsanto. Brunnquell was a CPA during the time of the accounting fraud.
Jonathan W. Nienas was the U.S. Strategic Account Lead for the Roundup Division from September 1, 2009 until he retired in January 2014.
Anthony P. Hartke held the title of U.S. Business Analyst in the Roundup Division from July 2008 to August 2010. He was a CPA during the time of the accounting fraud.
Accounting Standards
The accounting standards governing Monsanto's rebate programs is set forth in FASB Emerging Issues Task Force ("EITF") Issue No. 01-9, "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)," codified as ASC 605-50.1 Specifically, Issue 6 of EITF 01-9 (ASC 605-50-25-7) requires a vendor like Monsanto to recognize a rebate obligation as a reduction of revenue based on a systematic or rational allocation of the cost of honoring the rebate offer to each underlying transaction that results in progress by the customer towards earning the rebate. Issue 4 of EITF 01-9 (ASC 605-50-25-3) requires a vendor to recognize the cost of certain sales incentives at the later of either the date at which the related revenue is recognized or the date at which the sales incentive is offered.
Issue 1 of EITF 01-9 (ASC 605-50-45-1) addresses the circumstances in which a vendor may record payments to customers as a cost or expense [e.g., under the selling, general and administrative (SG&A) accounting classification] rather than as a reduction of revenue. EITF 01-9 (ASC 605-50-45-1) requires a vendor like Monsanto to recognize payments to customers to perform services on its behalf (and which provide an identifiable benefit to the vendor) as a reduction of revenue for the amount of the payments that exceeds the estimated fair value of the services rendered. If the services provided by customers do not provide a benefit to the vendor, it should recognize the total amount as a reduction of revenue.
Summary of the Facts
The SEC investigation found that Monsanto had insufficient internal accounting controls to properly account for millions of dollars in rebates offered to retailers and distributers of Roundup after generic competition had undercut Monsanto’s prices and resulted in a significant loss of market share for the company. 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.
According to the SEC’s order instituting a settled administrative proceeding against Monsanto and three executives:2
• 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 and Brunnquell approved 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 its U.S. sales of Roundup for the year occurred during that quarter.
• Brunnquell and Hartke knew, or should have known, that the sales force used this new rebate program to incentivize sales in 2009, and Generally Accepted Accounting Principles (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.
• Monsanto also improperly accounted for more than $56 million in rebates in 2010 and 2011 in Canada, France, and Germany. They were booked as SG&A 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 Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933; the reporting provisions of Section 13(a) of the Securities Exchange Act of 1934 and underlying rules 12b-20, 13a-1, 13a-11, and 13a-13; the books-and-records provisions of Exchange Act Section 13(b)(2)(A); and the internal accounting control provisions of Exchange Act Section 13(b)(2)(B).
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. Nienas also was found to have violated Exchange Act Section 13(b)(5). Brunnquell, Nienas, and Hartke must 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.
Ethics & Compliance Requirements
In determining to accept Monsanto’s Offer, the Commission considered remedial acts undertaken/to be undertaken by Monsanto.3
• Retain a qualified independent ethics and compliance consultant to conduct an ethics and compliance program assessment of Monsanto’s Crop Protection business. The Consultant shall also have expertise in, or retain someone with expertise in, internal accounting controls and public company financial reporting as well as vendor rebate and market funding programs.
• Analyze whether the components of Monsanto’s ethics and compliance program for its Crop Protection business have been implemented successfully and are having the desired effects. The Consultant will determine whether the culture is supportive of ethical and compliant conduct, including strong, explicit, and visible support and commitment by the Board and senior management.
• In discharging this undertaking, the Consultant shall evaluate and assess the effectiveness of the internal accounting controls and financial reporting policies and procedures with respect to Monsanto’s rebate and market funding programs for its Crop Protection business, including but not limited to:
O Assess whether Monsanto’s internal accounting controls with respect to Monsanto’s rebate and market funding programs for its Crop Protection business are sufficient to provide reasonable assurances that the company is maintaining fair and accurate books, records, and accounts, with particular emphasis on whether they are designed to address the integrity of its revenue accounting and ensure consistent accuracy and integrity given the global nature of Monsanto’s business; and
o Determine whether Monsanto has specific accounting and financial reporting controls and procedures sufficient to ensure that all rebate and/or market funding programs for its Crop Protection business comply with applicable accounting rules and policies.
O Provide a report to Commission staff and Monsanto’s General Counsel and Chief Ethics and Compliance Officer regarding the Consultant’s findings and recommendations.
Whistleblower
On August 30, 2016, the SEC announced the award of more than $22 million to an anonymous whistleblower whose detailed tip and extensive assistance helped the agency stop the well-hidden fraud at Monsanto, where the whistleblower worked. At the time, the $22 million-plus award was the second-largest total the SEC had awarded to a whistleblower under the Dodd-Frank Financial Reform Act.4
The whistleblower’s attorney, Stuart Meissner, shed light on the role of the external auditors Deloitte, in speaking on behalf of the whistleblower, in an interview with “Corporate Crime Reporter."5 Meissner raised concerns about the role of outside auditors.
We hope the agency will probe Monsanto’s outside auditor Deloitte for the role we believe it played in enabling the company to overstate earnings and issue misleading financial statements – not only once, but twice. There was an initial misstatement by Monsanto and a subsequent restatement –the restatement is actually the bigger issue of the two in my view,” Meissner said. When auditors are allowed to audit their own mistakes, it is difficult for them to be independent and objective. And when independence is impaired, the professional skepticism needed to recognize and flush out improprieties by management is not present. Professional skepticism of the auditor is the last line of defense for a management team that may have a clear bias in reporting positive results. To this day, Monsanto investors still do not have accurate financial statements for the periods involved in the case. I do not believe that investors have been able to reasonably access the performance of the company, including whether or not Monsanto hit the mid-teen percentage growth targets management committed to in 2010. If a true independent auditor not associated with the financials had been appointed to audit the restated financials, I believe there would be a higher likelihood that investors would know the true performance of the company and be in a better position to make fully informed decisions.
Questions.
1. What is the underlying accounting and financial reporting concept at issue as described in EITF Issue No. 01-9 with respect to the way Monsanto accounted for customer rebates? Explain in your own words how Monsanto’s accounting led to materially misstated financial statements.
2. Given that Monsanto was under great pressure from competitors that sold generic brands similar to Roundup, would you characterize the Monsanto situation as a business failure, an accounting failure, and/or an audit failure? Explain.
3. Of what value are the ethics and compliance requirements agreed to by Monsanto? Do you believe all companies that experience financial fraud should be required to institute such changes? Can such requirements change the culture of a global company such as Monsanto?

Question: Monsanto is an agricultural seed and chemical