Question

Under Armour Ine, shares fell nearly 199 after the company confirmed it was the subject of a federal investigation into its accounting practices. Executives declined on an earnings call Monday to provide details about the probe or explain why Under Armour hadn't previously disclosed its existence, even though they had been responding to document requests for more than two years. "We have been fully cooperating with these inquiries for nearly 2 years," Under Armour CFO David Bergman said. "We firmly believe that our accounting practices and disclosures were appropriate." Read more Under Armour Is Subject of Federal Accounting Probes Under Armour Founder Kevin Plank Steps Aside as CEO Meet Under Armour CEO's Unusual Adviser: An MSNBC Anchor On Sunday, The Wall Street Journal reported that the Justice Department and the Securities and Exchange Commission are examining the sportswear maker's revenue recognition practices and whether it shifted sales from quarter to quarter to make them appear stronger. After the Journal published the article, Under Armour said it is cooperating with investigators and that it began responding in July 2017 to requests for documents and information relating primarily to its accounting practices and related disclosures. Under Armour's Class A shares closed at $17.14 on Monday, down 18.9%. On the earnings call, an analyst asked how significant the investigation was and why investors were just hearing about it now." Mr. Bergman, a longtime company executive who took over as CFO in February 2017, said the company was prohibited from discussing the matter. "So now we're focused on 2020 and beyond," he said. On the same call, Chairman and CEO Kevin Plank didn't address the matter. Justice Department prosecutors are conducting a criminal inquiry into the matter in coordination with civil investigators at the SEC, the Journal reported. Spolespeople for the Justice Department and SEC declined to comment.

Answer 1

PART – 1)

The nature of this probe is considered as criminal because the company is involved in the inappropriate accounting practices and the investigation is done by the SEC (Securities and Exchange Commission) and the Justice Department.

PART – 2)

Violation of GAAP:

a). Revenue recognition = It means that revenue should be recognized when the firm earns the revenue by selling product or providing services. But the ‘Under Armour’ is involved in the practices where it has shown the revenues before actually earning such revenues.

b). Accrual concept = It requires that the firm should recognise expenses when they actually incur and revenues when they are earned but the company has delayed in recognizing revenues so that the position of revenues become strong.

PART – 3)

Brief history:

On February 2016, the company has appointed Mr. Malloy as the new Chief financial officer (CFO) after the resignation of Mr. Dickerson. The company is showing the growth rate of 20% in revenue before 2017. But in January, the growth in revenue was only 12% after which Mr. Malloy also left the company. Then, Mr. Bergman was appointed as the permanent CFO. From July 2017, the company starts cooperating with the federal investigation. The company was alleged for the fraudulent accounting practices. The profit of the company is reported at $102 million and its sales declined by 1% to            $1.43 billion.

PART – 4)

The CFO of the company has changed consecutively for three years. It has total three CFO in three years period. It is the matter of concern and the reason for such change is required to be probed by the investigation team. When the higher authority changes frequently then it will affect the operation of the business firm considerably for the temporary period. It also leads to wastage of time and fear in the employee regarding layoffs, job change, etc.

PART – 5) The schedule for the data of net sales, net income and EPS for four years is shown as follows:

A. В Е Schedule showing net income, sales and EPS for four years Particulars 2016 2018 2 2015 2017 $3,963,313 $4,833,338 $4,989,244 $5,193,185 $232,573 $256,979 ($48,260) ($46,302) ($0.11) ($0.11) Net Sales 3 Net Income/Loss 4 $0.45 ($0.10) EPS for Class A and B 5 $0.72 ($0.10) EPS for Class C 6 7 LO LON

The operating revenues of the firm increases considerably which causes decline in the income statement of the company. The net income in the period of 2015 and 2016 is positive but in 2017, the income reduced drastically when the investigation starts and it is found that the company is violating GAAP for recording financial transactions. The EPS of the firm is also declining as the revenue fall. The revenue growth was fall after the investigation started and because of the heavy competition.