{"id":2805,"date":"2023-12-11T11:35:28","date_gmt":"2023-12-11T16:35:28","guid":{"rendered":"https:\/\/seci.wpenginepowered.com\/?p=2805"},"modified":"2023-12-11T11:35:32","modified_gmt":"2023-12-11T16:35:32","slug":"channel-stuffing-to-manipulate-a-non-gaap-measure-enforcement","status":"publish","type":"post","link":"https:\/\/seciblog.pli.edu\/index.php\/channel-stuffing-to-manipulate-a-non-gaap-measure-enforcement\/","title":{"rendered":"Channel Stuffing to Manipulate a Non-GAAP Measure?\u00a0\u00a0Enforcement!"},"content":{"rendered":"

When a company presents a non-GAAP measure investors generally should ask, \u201cIs this non-GAAP measure presented to try and make things look better than the story the related GAAP measure tells?\u201d\u00a0 For example, in this SEC enforcement against ADT<\/a>, the company presented adjusted EBITDA in the headline of its earnings release, highlighting a 7% increase, but did not mention that the company\u2019s GAAP loss had increased from $(141) to $(157) million until later in the release.\u00a0 Highlighting a positive change in a non-GAAP measure while the comparable GAAP measure deteriorates raises significant questions.\u00a0 In addition, ADT did not follow Regulation S-K Item 10(e), which clearly applies to a company\u2019s earnings release, and requires that GAAP measures be presented with equal or greater (OK, really greater) prominence than the comparable non-GAAP measure.<\/p>\n

In an interesting twist on this process, as discussed in a recent enforcement release<\/a>, a company disclosed a non-GAAP measure that was not as positive as the related GAAP measure, but used a classic revenue manipulation strategy to make the non-GAAP measure look more positive.<\/p>\n

In the headline for its third-quarter 2016 earnings release<\/a>, Newell Brands said:<\/p>\n

Newell Brands Announces Third Quarter Results<\/strong><\/p>\n

Net Sales Growth of 158.5%; Core Sales Growth of 3.0%<\/p>\n

New Strategic Plan Transformation into Action<\/p>\n

Raises 2016 Guidance to Top Half of Range<\/p>\n

Provides 2017 Initial Outlook<\/p>\n

At first glance, all appears reasonable with this headline.\u00a0 In particular, placing GAAP sales growth before the non-GAAP measure \u201ccore sales growth\u201d follows the S-K Item 10(e) requirements discussed above, and avoids the frequent \u201cequal or greater prominence\u201d non-GAAP measure comment.<\/p>\n

The large difference between the GAAP and non-GAAP sales growth rates raises a number of questions.\u00a0 The earnings release notes that the GAAP sales growth is primarily due to the impact of an acquisition.\u00a0 The question that naturally arises is, \u201cwhat would have happened to sales without the acquisition?\u201d<\/p>\n

Below is the rationale for the company\u2019s presentation of \u201ccore sales growth.\u201d\u00a0 In its non-GAAP measure disclosures Newell Brands says:<\/p>\n

\u201cThe company\u2019s management believes that core sales provides a more complete understanding of underlying sales trends by providing sales on a consistent basis as it excludes the impacts of acquisitions (other than the Jarden acquisition, which is included in core sales on a pro forma basis starting in the second quarter of 2016), planned or completed divestitures, the deconsolidation of the company\u2019s Venezuelan operations and changes in foreign currency from year-over-year comparisons.\u201d<\/p>\n

This presents a reasonable rationale for the presentation of the non-GAAP measure, and, in fact, the non-GAAP measure presents a reasonably positive picture.<\/p>\n

This seemed true until September 29, 2023, when the SEC released an Accounting and Auditing Enforcement Release<\/a> describing how Newell and its former CEO engaged in a classic revenue manipulation scheme \u2013 channel stuffing or \u201cpull-forwards\u201d \u2013 designed to inflate this non-GAAP measure.\u00a0 According to the AAER:<\/p>\n

\u201cDuring the last month of each quarter in the Relevant Period, Newell employees determined that its sales were inadequate to achieve management goals, including internal targets, guidance to investors, or analyst estimates. As part of an effort to achieve those goals, Polk (the former CEO) was made aware of and approved plans to pull forward sales scheduled for subsequent quarters. To do so, Newell employees identified orders scheduled for delivery early the following quarter and obtained customer permission to deliver those orders in the current quarter. Newell employees then informed Polk of the volume of orders that had been pulled forward.\u201d<\/p>\n

Many companies have used this strategy to try and maintain a sales growth rate.\u00a0 As we discussed in this post about Under Armour<\/a> (where you can find links to a number of similar cases), this is not an unusual kind of fraud.\u00a0 In this case, however, it is interesting that the strategy was used specifically to manipulate the non-GAAP measure for \u201ccore sales growth.\u201d<\/p>\n

The company and the former CEO both entered into cease and desist orders and paid fines of $12,500,000 and $110,000, respectively.<\/p>\n

As always, your thoughts and comments are welcome!<\/p>\n","protected":false},"excerpt":{"rendered":"

When a company presents a non-GAAP measure investors generally should ask, \u201cIs this non-GAAP measure presented to try and make things look better than the story the related GAAP measure tells?\u201d\u00a0 For example, in this SEC enforcement against ADT, the company presented adjusted EBITDA in the headline of its earnings release, highlighting a 7% increase, … Continue reading Channel Stuffing to Manipulate a Non-GAAP Measure?\u00a0\u00a0Enforcement!<\/span> →<\/span><\/a><\/p>\n","protected":false},"author":9,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2},"_wpas_customize_per_network":false},"categories":[261,143],"tags":[],"coauthors":[154],"class_list":["post-2805","post","type-post","status-publish","format-standard","hentry","category-enforcement","category-hot-topic"],"jetpack_publicize_connections":[],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"post_mailing_queue_ids":[],"_links":{"self":[{"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/posts\/2805","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/users\/9"}],"replies":[{"embeddable":true,"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/comments?post=2805"}],"version-history":[{"count":0,"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/posts\/2805\/revisions"}],"wp:attachment":[{"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/media?parent=2805"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/categories?post=2805"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/tags?post=2805"},{"taxonomy":"author","embeddable":true,"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/coauthors?post=2805"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}