This week’s GAAP Flash includes articles about accounting errors involving revenue recognition (ASC 605), leases (ASC 840), and disclosure requirements provided to help increase business acumen of CPAs. Remember, #accountingmatters.

Monsanto Rounds Up $80 Million in Accounting Violations (February 9, 2016) – Accounting Today (@AccountingToday)

The SEC reported that agribusiness Monsanto Company has agreed to pay an $80 million penalty and retain an independent compliance consultant to settle charges that it violated accounting rules and misstated company earnings. At issue was the way the company accounted for millions of dollars of rebates related to its flagship product, Roundup (hence the clever headline), and that they failed to maintain proper accounting controls.

How It’s Relevant: Monsanto booked revenue resulting from sales incentivized by a rebate program but failed to recognize all of the related program costs at the same time. In a subsequent article, Accounting Today reported that an internal whistleblower brought this error to the attention of the SEC. Of the $80 million penalty imposed, up to $24 million could be collected by the whistleblower! The SEC program awarding money to these whistleblowers has created incentive for accountants all over, internal AND external, to uncover corporate wrongdoing and protect investors. This is one more mechanism for companies to do the right thing and listen to financial reporting concerns raised by accountants!

Senate Committee Chairman Asks CFTC to Explain Major Accounting Error (January 21, 2016) – Reuters (@reuters)

A senate committee and auditors revealed a significant accounting error at a derivatives market regulator, the CFTC. The Commodity Futures Trading Commission understated liabilities by $194 million in the year ended September 30, 2015 and by $212 million the year before. This understatement arose from improper lease accounting under ASC 840 and was likely caused by weaknesses in internal control over financial reporting.

How It’s Relevant: These errors are huge, comprising more than 75% of the CFTC’s annual budget of $250 million and shows what happens when judgment is involved in accounting principles. The CFTC should have recorded its full leasing obligations at the start of the lease; instead, it treated these leases as a series of year-long leases, meeting the criteria of operating leases. However, if renewal is a virtual certainty, the term length should have been aggregated and then evaluated against capital lease criteria, which would have required grossing up the balance sheet for a long-term leasing obligation.

Also, these errors reveal the issue that improper judgments made with the start of new transactions, like leases, can have a very long impact on the financial statements. It is estimated that these accounting errors occurred as far back as 2005. It is important for auditors to understand the accounting for significant accounts and disclosures EVERY YEAR. Do not blindly rely on evidence from prior year!

Brixmor Top Executives Manipulated Financials, Company Says (February 8, 2016) – The Wall Street Journal (@wsj)

The New York-based property group announced that chief executives manipulated financial results to “smooth” income by showing consistent results period to period. While the numbers were determined not to materially misstate its financials, the audit committee believes the conduct that precipitated the manipulation was. The CEO, CFO, and CAO all resigned, effective immediately.

How It’s Relevant: Fraud risks manifest themselves in many ways, and fraudulent reporting starts at the top levels of management. The long-used phrase “tone at the top” continues to ring true today! Poor tone leads to poor controls, poor judgment, and poor accounting, at least according to generally accepted standards. Read about the follow up article below to learn more.

Executive Bonuses at Issue in Brixmor’s Admission of Altered Results (February 11, 2016) – MarketWatch (@MarketWatch)

It turns out that Brixmor actually smoothed a non-GAAP income measure called “same property net operating income.” This measure is not material for U.S. GAAP; however, it is very important for investors of property groups and REITS. Executive incentive bonuses, which use a term called “cash net operating income,” are indirectly tied to this non-GAAP measure based on the way both measures are calculated.

How It’s Relevant: This case is very unique since the manipulation happened to a non-GAAP, rather than a GAAP, measure of profitability. However, knowing that the calculation of this measure may impact the bonus level for executive officers adds a new twist to the story. Even though auditors typically do not worry much about non-GAAP measures, it is important to consider how bonuses and incentives are structured, which can reveal additional risks of fraud!

An SEC Investigation: To Disclose or Not Disclose? (February 8, 2016) – Lexology (@lexology)

In a recent case, the SEC investigated a lender that knew one of its borrowers was having difficulty making regular loan payments. However, the lender disclosed in its SEC filings that there was not “serious doubt” about the borrower’s ability to repay the loan. The SEC commenced its investigation by issuing a subpoena to the lending company.

How It’s Relevant: Disclosures matter! The notes to the financial statements are governed by U.S. GAAP. Disclosures need to be subject to the same rigorous audit procedures that are performed on significant accounts within the balance sheet and statement of income. Remember that an audit opinion covers all financial statements and its notes!