ADM’s Accounting for Financial Statement Restatements Questionable
Should it be a Treated as a “Big R” or a “little r”?
Last week it was announced that Archer Daniels Midland (ADM) is under investigation by the U.S. Justice Department over its accounting practices. In January 2024, ADM placed its Chief Financial Officer, Vikram Luther, on administrative leave after the company said it was conducting an internal probe of accounting practices, following a request for documents issued by the U.S. Securities and Exchange Commission (SEC). The company corrected some past financial results over the years while reporting lower quarterly sales and a more than 40 percent drop in earnings compared with a year ago.
The accounting problems at ADM were big: the CFO was suspended, federal authorities investigated, and the stock price plummeted as the company announced a probe into its accounting practices earlier this year.
The Accounting Issues
According to Nicola White, a reporter at Bloomberg, “when it came to correcting actual numbers, however, the company went small.” The company revised three years of results for certain operating segments, a “so-called ‘Little Revision,’ a quiet correction that doesn’t require the fanfare of releasing a special 8-K announcing a restatement or re-issuing old financial reports.”
The SEC and Department of Justice “investigations continued, but the errors were a small part of its financial results. It simultaneously said the revision didn’t trigger a review under new executive compensation clawback rules.”
“We determined that the adjustments are not material to our consolidated financial statements, taken as a whole for any period,” CEO Juan Luciano told analysts on the company’s earnings call Tuesday.
The SEC requires companies that uncover errors in their past financial statements to correct them. Significant errors are considered red flags in financial reporting, forcing companies to issue statements that they need to fix their mistakes and then file updated financials with the SEC. Smaller errors can be corrected by revisions, which get disclosed in the next period’s financial statements.
The company last week shrank its previously reported operating profit in the nutrition segment by $31 million, or 7%, for the year ending 2023. It also reduced operating profits for 2022 by $68 million, or 9%, and revised the 2021 operating profit by $59 million, an 8.5% reduction. The accounting fixes won’t affect executive bonuses, the company said.
SEC Focus on Restatements
Nicola White points out that Wall Street’s top regulator pays close attention to cases where companies are perceived to sweep accounting errors under the rug without calling them out in a “Big R” restatement. SEC Chief Accountant Paul Munter in March 2022 warned companies against using stealth revisions to fix accounting mistakes if those errors could be considered relevant to investors and analysts. Companies must consider not just the numerical materiality of mistakes; he has said in further public speeches.
A study of restatements shows that many companies are turning away from announcing restatements in Form 8-K and have avoided amending previously issued financial statements for the periods affected. Companies are instead revising the affected numbers for the previous periods and showing them in subsequent quarterly or annual reports (little “r” restatements).6 The problem is by not including it in an 8-K filing as required in “R” restatements, the restatement does not get publicly disclosed and may mislead users into thinking nothing important has happened that would warrant restatement. It is ethically problematic to bury restatements in quarterly and annual reports rather than to have a separate filing with the SEC in the 8-K.
One consequence of having restatements is that material misstatements caused by accounting irregularities may cast doubt on managements’ integrity and expose the company to regulatory scrutiny or litigation. It is up to the audit committee to ensure that these restatements are properly disclosed and relevant adjustments to the financial statements are made. The audit committee should also discuss these matters with the external auditors.
ADM needs to take steps now to do a thorough investigation of the financial changes required, determine the materiality both in quantity and quality and make the appropriate call in deciding whether the generally accepted accounting principles require it to be treated as a Big-R or Little-r, even if it means the previous year financial statements have to be reissued, something the company wants to avoid but is the better way to report it to investors.
Posted by Steven Mintz, Ph.D., aka Ethics Sage, on March 18, 2024. You can sign up for his newsletter and learn more about his activities at: https://www.stevenmintzethics.com/.
]]>Causes and Solutions to Workplace Conflict
When you put a lot of people together in one place, there will naturally be conflict. This is especially true at work because the workplace is often made up of a diverse group of people who all have different personalities, ideals, opinions, and backgrounds. While diversity in the workplace is good, it does mean people are going to disagree from time to time.
Though conflict in the workplace is normal, it’s important to be mindful of how conflicts are resolved. If handled inappropriately, it can make the conflict worse, lead to more instances of conflict in the future, and can contribute overall to a negative and unproductive workplace.
In this article, we will dive deeper to better understand what conflict resolution is and the causes of workplace conflict. We will also offer conflict resolution tips and strategies for a more harmonious workplace.
In the simplest terms, conflict resolution is the process of recognizing, addressing, and resolving conflicts or disputes among employees or coworkers. This involves two or more parties working toward a solution that resolves the dispute in a way that satisfies everyone involved. The goal of conflict resolution should be to handle the disagreement in a way that promotes and fosters a more positive work environment moving forward.
Conflict can arise for various reasons. However, workplace conflicts are generally categorized in one of two ways:
In either case, both types of conflict can lead to a much larger issue if left unaddressed or handled inappropriately. Other more specific causes of conflict in the workplace can include:
Again, while some of these issues might seem normal, if left unaddressed, they can spiral into a much larger problem. It is crucial to be on the lookout for conflict so it can be addressed and handled professionally and ethically as soon as possible.
Conflict is such a common occurrence in the workplace that there are numerous professional resources for how to deal with these situations. To that end, here are some tips to help your company better handle conflicts and build a more positive and harmonious workplace culture.
As mentioned above, poor leadership and poor decision-making are common causes of workplace conflict. One of the best ways to handle and prevent conflicts is to train your management and executive teams to be better and more ethical leaders.
All your workplace leaders should be trained in conflict management, which includes developing skills such as active listening, emotional intelligence, patience, positivity, impartiality, and open communication. Additionally, they should also work on honing these specific conflict resolution skills:
It also helps to have empathy for all those involved. Understanding how each person feels from their perspective can help you reach a solution that ensures everyone is satisfied, which also requires knowing how to compromise.
Making sure conflicts are properly reported can also help with ethical conflict resolution. An official report of the conflict incident ensures human resources are aware in case there are any continuing issues or in case anyone thinks the issue was resolved unfairly.
Incident reports keep things transparent and can also help the company track conflict trends. These kinds of records enable the company to identify if there are any patterns, so they can develop a better solution to prevent these conflicts moving forward. Having an official report can also help leaders learn from their mistakes and understand what they need to do differently next time a similar conflict occurs.
Even with the best-laid conflict resolution plans, conflict can still happen. This is especially true when you work in a high-pressure industry.
If conflict resolution strategies don’t seem to be working, the problem might be that your employees are simply too stressed. If this is the case, the answer might be in finding better ways to manage and reduce stress for your employees.
If long hours are part of the problem, look for ways to offer employees more breaks and time to take care of their personal needs. You can also investigate alternative work schedules, which can offer employees a better work-life balance.
If the issue is that your employees have too much to do and not enough time, try to find ways to alleviate their workload. Automate repetitive tasks, or improve task delegation — look for new ways to handle business adversity such as adopting better tools and managing customer demand more systematically.
Better benefits and employee appreciation programs can also help. This can include better pay, better healthcare plans, offering gym memberships or discounts, or even creating a space in the office where employees can go for a few minutes to meditate, decompress, and maybe even stretch and do yoga.
Though conflict is common in the workplace, you must learn to identify and address issues quickly and more positively and efficiently to prevent issues in the future. Conflict should be addressed early, leaders should show empathy and practice active listening, and resolutions should be a compromise that ensures everyone’s satisfaction to avoid bias or one-sided solutions.
From time to time, I post a guest blog. Today's blog is the work of Charlie Fletcher. You can Charlie at: charliefletcher365@gmail.com.
Posted by Steven Mintz, Ph.D., aka Ethics Sage, on March 14, 2024. You can sign up for his newsletter and learn more about his activities at: https://www.stevenmintzethics.com/.
]]>Lack of Experience and Training is the Underlying Cause
The following blog is taken from an interview soliciting my views on SPAC audit problems that was published by CFO Brew online by Courtney Vien on March 1, 2024.
In case you needed more proof that the Special Purpose Acquisition Companies (SPAC) boom is over, the PCAOB just sanctioned WithumSmith+Brown, one of the firms that made it happen. It charged the company, one of the dominant players in the SPAC auditing market, with “pervasive quality control violations” in its SPAC practice. Withum, which neither accepted nor denied responsibility, agreed to pay a $2 million civil penalty, have its staff undergo training, and allow its quality control to be reviewed by an independent consultant.
Withum’s audit practice swelled nearly 500% in 2021 during the SPAC boom, the PCAOB said. It oversaw nearly 450 audit reports that year, compared with around 80 in 2020. But the firm didn’t increase staff levels to compensate: It only assigned 50% more partners to audits, going from 15 to 23.
Withum isn’t the only firm to face regulatory scrutiny over its SPAC work: In June 2023, the SEC and PCAOB together fined Marcum, [a larger player in the field,] $13 million over audit deficiencies, mostly related to SPACs. At one point, its SPAC practice helped make it the fifth-largest public-company auditing firm in the nation.
The firms’ staff lacked the experience and training necessary to handle SPAC audits, which can be complex, Steven Mintz, an ethicist and professor emeritus of accounting at California Polytechnic State University, told CFO Brew. “A lot of the firm personnel were not really skilled, knowledgeable, or competent enough in dealing with the issues specific to SPACs,” he said.
High workloads, combined with the compressed timelines characteristic of SPACs, could lead auditors to cut corners, Mintz said. SPACs, unlike traditional IPOs, typically only have around 24 months to acquire a target company before the trust must return investors' money.
In fact, the engagement quality reviewer at Crowe, a UK firm the SEC disciplined for audit issues around a SPAC, said he didn’t conduct a thorough review because he was under pressure from the engagement team to meet the SPAC’s deadline, Mintz wrote in a CPA Journal article. About a third of Marcum’s engagement quality reviews sign-offs were signed after issuance or were missing altogether, the SEC found.
Part of the problem, Mintz said, is that because SPACs didn’t become very popular until 2020, few auditors had experience with them.
“Any unique form of investment typically creates a lot of problems in the initial stages,” he noted. As both regulators and auditors become more conversant with SPACs, though, he’s hopeful the problems will ebb. “My guess is that things will start to clean up a bit as the number of new SPACs goes down, and as auditors get competent in the field, get training, and learn from their experience,” Mintz said.
Posted by Steven Mintz, Ph.D., aka Ethics Sage, on March 7, 2024. You can sign up for his newsletter and learn more about his activities at: https://www.stevenmintzethics.com/.
]]>A Cautionary Tale
I’ve always been intrigued by the philosophy of whistleblowing. It is an act of conscience and not motivated by self-interest.
A broad view of whistleblowing is the disclosure by organization members (former or current) of illegal, immoral, or illegitimate practices under the control of their employers, to persons or organizations that may be able to effect action. This definition includes whistle-blowers who use internal channels (e.g., a hot line or ombudsperson) or external channels (e.g., the external auditors or the SEC) to blow the whistle.
There are four elements of the whistleblowing process: the whistleblower, the whistleblowing act or complaint, the party to whom the complaint is made, and the organization against which the complaint is lodged. The act might be labeled as one of “dissidence,” somewhat analogous to civil disobedience. It may be seen as disloyal by some but in the public interest by others.
Given that the act of whistleblowing is a personal choice, the key to whether an individual will blow the whistle on wrongdoing is whether the whistle-blower perceives organizational policies are designed to encourage whistleblowing.
Research has shown that what whistleblowers hope and believe their speaking out will achieve, is the correction of what they perceive as an organizational wrongdoing (e.g., fraudulent financial statements). This research also found that not everyone who perceives a wrongdoing, acts upon that perception. In fact, only 42 percent said they were ready to blow the whistle.
The Association of Certified Fraud Examiner report data on organizational culture that includes whistleblowing. The results for 2022 are as follows.
Initial Detection of Occupational Frauds from the ACFE 2022 Global Study on Occupational Fraud and Abuse
Detection Method |
Percentage Reported |
Median Loss |
Tip |
42% |
$117,000 |
Internal Audit |
16% |
$108,000 |
Management Review |
12% |
$105,000 |
Documentation Examination |
6% |
$200,000 |
By Accident |
5% |
$100,000 |
Account Reconciliation |
5% |
$74,000 |
External Audit |
4% |
$219,000 |
Automated Transaction/Data Monitoring |
4% |
$50,000 |
Surveillance/Monitoring |
3% |
$60,000 |
Notified by Law Enforcement |
2% |
$500,000 |
Confession |
1% |
$159,000 |
As you can see, most of the whistleblowers come from within the organization. In fact, only 4% of whistleblowing is done by external auditors, which raises the question: What is the purpose of an audit? This is a complex issue and the subject of future blogs.
Whistleblowing regulations attempt to protect individuals when they behave responsibly towards society in light of irresponsible behavior by their organizations. This certainly is the motivation for the anti-retaliation provisions of both the Sarbanes-Oxley Act and the Dodd-Frank Financial Reform Act. The acknowledgement of the need for such protection, however, implies that moral agency, autonomy and responsibility are problematic in organizations, or at the very least, that they do not come naturally and are not welcomed when they arrive. When organizations establish an ethical culture and anonymous channels to report wrongdoing, they create an environment that supports whistleblowing and whistle-blowers while controlling possible retaliation.
Whistleblowing always involves an actual or at least declared intention to prevent something bad that would otherwise occur. It always involves information that would not ordinarily be revealed. Most ethicists agree whistleblowing is an ethical action. According to the “standard theory” on whistleblowing, whistleblowing is morally required when it is required at all; people have a moral obligation to prevent serious harm to others if they can do so with little costs to themselves.
The morality of whistleblowing might be viewed from the perspective that corporations have a moral obligation not to harm. De George identifies five criteria when whistleblowing is morally permitted. Briefly, (1) the firm's actions will do serious and considerable harm to others; (2) the whistleblowing act is justifiable once the employee reports it to her immediate supervisor and makes her moral concerns known; (3) absent any action by the supervisor, the employee should take the matter all the way up to the board, if necessary; (4) documented evidence must exist that would convince a reasonable and impartial observer that one's views of the situation is correct and that serious harm may occur; and (5) the employee must reasonably believe that going public will create the necessary change to protect the public and is worth the risk to oneself.
De George’s criteria establish the foundation for moral behavior to occur when contemplating whistleblowing. He rejects the position that external whistleblowing is always morally justifiable, and also rejects the position that external whistleblowing is never morally justifiable. Basically, his position is that the whistleblower should have a moral motivation to engage in the act (i.e., to expose unnecessary harm, and illegal or immoral actions).
One question that has always interested me is how a whistleblower can bounce back after blowing the whistle, which is a painstaking process. It requires resilience. In other words:
Commitment: The desire to do the right thing regardless of the consequences. Consciousness: Awareness: Act consistently and apply moral convictions to your daily behavior. Competence: The ability to collect and evaluate information, and to foresee the potential consequences of actions on others.
Would-be whistleblowers should ask: How they could take an action that family and loved ones would be proud of and how they would want to be remembered.
Ethics and morality go hand in hand. If you face an ethical crisis in the workplace, consider first whether real harm may be done to others if you don’t do everything in your power to correct the situation. Then, commit to acting ethically; first considering the consequences of your actions on others including yourself. No one is obligated to take actions that might harm one’s own interests. However, our moral obligation to society does obligate us to right a wrong when we see one that has occurred.
Posted by Steven Mintz, Ph.D., aka Ethics Sage, on February 29, 2024. You can sign up for his newsletter and learn more about his activities at: https://www.stevenmintzethics.com/.
]]>Keys to Data Governance and Accountability
"Who controls the past controls the future; who controls the present controls the past" – George Orwell***
In the classic novel "1984," George Orwell explains that those exerting authority over information can apply influence over the future. There's a suggestion that organizations empowered to shape interpretations can sway memory and understanding. By dictating what data is remembered or erased, these organizations can mold the narrative and shape expectations for the future.
Simultaneously, those in power in the present have the capacity to manipulate or reinterpret anything using data and analytics. This quote underscores the pivotal role of controlling data and leveraging analytics in influencing public perception and consolidating power over time.
All this from a book written in 1949. Who knew that this would be so relevant in today’s data and analytics landscape?
In today's terms, Orwell's quote underscores the power dynamics in controlling information. In our data-driven age, those who control the narrative through data have the ability to influence public perception and shape the course of events. A contemporary example is the recent $368 million fine imposed on TikTok by the European Union. This incident highlights the potential impact of data processing on user privacy, echoing Orwell's warning about controlling the past to dictate the future. TikTok's case serves as a reminder that even platforms with over 1 billion users worldwide must adhere to strict data protection regulations, emphasizing the ongoing challenges in balancing innovation with ethical data practices in our digital landscape.
Companies are struggling with the ability to control their data. I recently attended Qbiz Inc.’s inaugural Executive Data Governance Meetup and found that, regardless of industry, organizations are still having challenges with Data Governance. Whether it’s a taboo word in a company or a lack of priority, organizations are not realizing the value in their Data Governance. But the rise in Artificial Intelligence (AI) has exposed an even greater need for this practice. Gustavo Bermudez and I were examining how organizations currently have the ability to control how their information is being used.
Traditional ways of managing data are no longer effective, where speed and agility are paramount. Balancing speed with regulatory commitments is another matter. Recently, OpenAI learned that its ChatGPT AI chatbot violated GDPR privacy rules and leaked sensitive data. The incident adds to the increasing regulatory scrutiny faced by AI systems globally, with the U.S. Federal Trade Commission and EU regulators investigating similar issues involving multiple technology giants (not to mention the EU AI Act that was passed last December).
I was discussing with Kevin O'Callaghan and he indicated work is needed for transparency on where the data for such models is sourced from. From there asking what controls are in place to protect people and privacy, beyond what is known in the public domain. Legal cases and regulation will end up doing the heavy lifting, but ultimately all parties have to control how such data is sourced and whether it is easy or difficult it is for use in large language models (LLMs). This is something that leans heavily on an organizations ethical control especially with personal data.
So how can we be certain we’re still in control?
The EDM Council discusses the importance of Data Governance in its Cloud Data Management Capabilities (CDMC) Framework. The framework emphasizes the significance of Governance and accountability in effectively managing data in cloud environments, addressing challenges and opportunities associated with scale, standardization, and the shared responsibility model. Key focus areas include defining strategic business cases, extending data ownership roles, and leveraging cloud automation for Data Governance. Key controls in Governance and accountability include:
The framework underscores the importance of understanding and implementing controls for managing data sovereignty and cross-border data movement risks.
Meta could have avoided some of its recent issues had it implemented Enterprise Data Governance and robust data controls. By implementing strict data controls, these platforms can more effectively identify and remove inappropriate content through advanced content detection algorithms and reporting mechanisms. Additionally, comprehensive Data Governance frameworks ensure accountability and compliance, enabling companies to respond promptly to legal obligations and regulatory measures, contributing to a safer online environment for everyone. Here are just a couple ways Data Governance could help:
These are a few ways current technology can contribute to a safer environment for us all. Issues like the ones discussed above can be avoided.
In this continually evolving technological landscape, where data, technology, and analytics converge, Orwell's words remind us of the need for safeguards, transparency, and ethical considerations. We must all commit to oversight and responsible Data Governance. In a world where data shapes our reality, the imperative is clear: prioritize the ethical use of data to forge a safer and more equitable environment for everyone.
How are you contributing to this crucial conversation, and what steps do you believe individuals and organizations should take to ensure responsible and ethical data practices?
***Original quote also immortalized by Rage Against The Machine in 1999’s Testify
This blog was written by Gregory Hahn who has a new position at Capgemini in charge of data and analytics strategy.
Blog posted by Steven Mintz, aka Ethics Sage, on February 13, 2024. Sign up for Steve's newsletter and learn more about his activities at: https://www.stevenmintzethics.com/.
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