'For Dr. Sir Adams only'.

Running Head: ASSIGNMENT 1: AUDITOR AND REGULATORY OVERSIGHT 1

Auditor and Regulatory Oversight

J

Dr.

University

ACC403

AUDITING

January 29, 2017

1 When the stock market crashed in October 1929, so did public confidence in the U.S. markets. Congress held hearings to identify the problems and search for solutions. Based on its findings, Congress in the peak year of the Depression passed the Securities Act of 1933. The following year, it passed the Securities Exchange Act of 1934, which created the SEC. The Securities and Exchange Commission (SEC) mission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital information (investor.gov). The SEC requires public companies to disclose meaningful financial and other information to the public. This provides a common pool of knowledge for all investors to use to judge for themselves whether to buy, sell, or hold a particular security. Only through the steady flow of timely, comprehensive, and accurate information can people make sound investment decisions (sec.gov). The SEC relies on the Financial Accounting Standards Board (FASB) to develop accounting rules and standards to keep financial reporting accurate and honest. Financial statements for publicly traded companies must be prepared in accordance with generally accepted accounting principles (GAAP). As a result, financial statements filed with the SEC by public companies follow the GAAP accounting guidelines established by the FASB provide a consistent overview of the view of how companies have performed financially.

On February 17, 2016, The Securities and Exchange Commission charged bio-pesticide company, Marrone Bio Innovations and a former chief operating officer, Hector M. Absi Jr., with inflating financial results to meet projections it would double revenues in its first year as a public company. Founded in 2006, Marrone Bio Innovations is headquartered in Davis, Calforinia. Marrone Bio Innovations, Inc. provides bio-based pest management and plant health products primarily for agricultural and water markets in the United States and internationally. It offers herbicides; fungicides; nematicides; insecticides; algaecides for algae control; molluscicides for mussel and snail control; plant growth and stress regulators; and water treatment products for various applications, such as hydroelectric and thermoelectric power generation, industrial applications, drinking water, aquaculture, irrigation, and recreation.

The SEC alleges that former chief operating officer Hector M. Absi Jr. concealed from Marrone Bio’s finance personnel and independent auditor various sales concessions offered to customers, leading the Davis, Calif.-based company to improperly recognize revenue on sales.  Absi allegedly profited from the fraud. Moreover, Absi allegedly also inflated Marrone Bio’s revenue by directing his subordinates to obtain false sales and shipping documents and intentionally ship the wrong product to book sales. Absi deceived investors into thinking that it was a thriving, growing business that was achieving increases in revenue. He resigned in August 2014 shortly before the alleged fraud came to light and the company’s stock price plunged more than 44 percent when the company informed investors that its previously filed financial statements were unreliable (sec.gov). 

The SEC has instituted a settled administrative proceeding against Marrone Bio’s former customer relations manager Julieta Favela Barcenas for violations of the books and records provisions of the federal securities laws. Favela entered into a cooperation agreement to assist in the SEC’s investigation and ongoing litigation against Absi.

As a result, Marrone Bio CEO Pamela G. Marrone has reimbursed the company $15,234 and former CFO Donald J. Glidewell will reimburse the company $11,789 for incentive-based compensation they received following the filing of Marrone Bio’s misstated financial statements, as required by Section 304(a) of the Sarbanes-Oxley Act. They were not charged with any misconduct (Cohn, 2016).

In a class action complaint for violations of the federal securities laws, Marrone Bio Innovations was found to have improperly recognized revenue for a certain transaction; that, as a result, the Company’s revenue and financial results were misstated; that, as such, the Company’s financial statements were not prepared in accordance with GAAP. Given these accounting irregularities, the Company announced financial results that were in violation of GAAP and the following principles: The principle that “interim financial reporting should be based upon the same accounting principles and practices used to prepare annual financial statements” was violated (APB No. 28, 10) The principle that “financial reporting should provide information that is useful to present to potential investors and creditors and other users in making rational investment, credit, and similar decisions” was violated (FASB Statement of Concepts No. 1, 34); The principle that “financial reporting should provide information about the economic resources of Marrone Bio, the claims to those resources, and effects of transactions, events, and circumstances that change resources and claims to those resources” was violated (FASB Statement of Concepts No. 1, 40); The principle that “financial reporting should provide information about Marrone Bio’s financial performance during a period” was violated (FASB Statement of Concepts No. 1, 42); The principle that “financial reporting should provide information about how management of Marrone Bio has discharged its stewardship responsibility to owners (stockholders) for the use of Marrone Bio resources entrusted to it” was violated (FASB Statement of Concepts No. 1, 50); The principle that “financial reporting should be reliable in that it represents what it purports to represent” was violated (FASB Statement of Concepts No. 2, 58- 59); The principle that “completeness, meaning that nothing is left out of the information that may be necessary to insure that it validly represents underlying events and conditions” was violated (FASB Statement of Concepts No. 2, 79); and The principle that “conservatism be used as a prudent reaction to uncertainty to try to ensure that uncertainties and risks inherent in business situations are adequately considered” was violated (FASB Statement of Concepts No. 2, 95) (howardsmithlaw.com).

According to an official litigation filed on February 17, 2016, Absi intentionally withheld vital information regarding financials and closing sale agreements that ultimately impacted year end revenue totals to the company’s finance department and independent auditors.

As a result of the above mentioned violations, I would hold management accountable for failing to properly manage on of their senior executives who clearly was making an unforeseen impact into revenues. As Absi was “doubling” previous year’s numbers, which should have sparked leader’s attention to accurately understand how these events were unfolding. I believe they Absi too much power that put him in a position that allowed him to manipulate other individuals to do the dirty work for him. During the independent audits, Absi was given direct access to verify terms and conditions along with financial records by the company’s controller to review for accuracy before submitting. For this I fault Marrone Bio directly.

In light of the sustained regulatory focus, Marrone Bio and their counsel should ensure that procedures are in place to evaluate on an ongoing basis the sufficiency and effectiveness of internal controls. In particular, management and audit committees, working with outside auditors, are advised to evaluate whether their existing controls are designed to address these risks. The company should evaluate whether company growth, changes in the regulatory or competitive environment, or other factors warrant an increase in accounting and compliance personnel. Recognize that the existence of a financial statement error is not determinative of whether there is a material weakness in internal controls under the definition provided in Regulation S-X. More importantly, make sure that senior personnel are kept informed and are actively involved in internal control compliance (Halper, 2016).

References

Halper, J. M. (2016, May 4). SEC Enforcement and Internal Control Failures. Retrieved May 12, 2016, from https://corpgov.law.harvard.edu/2016/05/04/sec-enforcement-and-internal-control-failures/

SEC versus Marrone Bio Innovations, INC (United States District Court Eastern District of California Sacramento Division February 17, 2016), from https://www.sec.gov/litigation/complaints/2016/comp-pr2016-32-mbi.pdf

SEC. (2016, February 17). SEC Charges Biopesticide Company and Former Executive with Accounting Fraud [Press release]. Retrieved from https://www.sec.gov/news/pressrelease/2016-32.html

Cohn, M. (2016, February 19). Pesticide Company Charged with Accounting Fraud. Retrieved May 12, 2016, from http://www.accountingtoday.com/news/audit-accounting/pesticide-company-charged-with-accounting-fraud-77264-1.html