Please help me analysis this article
Medical Costs
15. ADS also accrued monthly for estimated medical costs for its
employees, and made adjustments to the accrual throughout the year
as actual cost information became available. As with pension costs,
the Company’s accounting policy was to capitalize in inventory
medical costs associated with manufacturing, which became part of
COGS, and to expense as part of SG&A medical costs associated
with non-manufacturing operations.
16. In March 2015, ADS personnel determined that actual medical
costs for February exceeded the Company’s accrual by $552,000.
Pursuant to the Company’s accounting policy, this $552,000 variance
should have been apportioned between manufacturing and
nonmanufacturing. Sturgeon, however, improperly directed that the
entire amount be allocated to manufacturing costs, which were
capitalized into inventory. This improper accounting overstated the
Company’s earnings by failing to account for a portion of the
adjustment as an SG&A expense.
17. The following month, ADS personnel determined that actual
medical costs for March were approximately $592,000 less than the
Company’s accrual. With this variance, Sturgeon improperly directed
that the entire amount be credited to SG&A accounts. This
improper accounting also overstated the Company’s earnings by
understating SG&A expenses. Together, these two improper
accounting entries overstated the Company’s fiscal fourth quarter
2015 income before taxes by approximately $401,000.
Capitalized Freight Costs
18. ADS ships inventory between plants as part of managing
inventory levels. ADS’s policy was to capitalize in inventory
freight costs associated with intra-company transfers of inventory.
In fiscal year 2015, ADS booked two unsupported adjustments to
capitalized freight that resulted in overstating the Company’s
earnings. In September 2014, Sturgeon directed a journal entry that
increased the capitalized freight account, and correspondingly
decreased COGS, by $500,000. This accounting entry lacked adequate
support. In addition, at year-end, accounting personnel booked a
journal entry that increased the capital freight account, and
correspondingly decreased COGS, by approximately $296,000. This
adjustment also lacked adequate support. These two accounting
adjustments overstated the Company’s 2015 income before taxes by
approximately $796,000.
Inventory Cost Standards
19. ADS used estimated standard costs to account for raw materials
and production costs in inventory and COGS. At year end, ADS
updated its standard costs based on updated raw material and
production costs. ADS’s accounting practice was to make an
accounting adjustment to inventory, and corresponding adjustment to
COGS, to reflect any changes to the inventory balance resulting
from the updated standard costs. ADS also maintained an inventory
reserve account to reflect changes between standard and actual
costs. From at least 2013, Sturgeon directed or approved frequent
adjustments to the reserve account without adequate corroboration
or documentation, which resulted in inaccuracies in certain
financial statements.
20. At the end of fiscal year 2015, as part of the Company’s annual
update of standard costs, Sturgeon updated many of the Company’s
standard costs, resulting in a material increase in inventory and
corresponding reduction in COGS. Many of Sturgeon’s cost
adjustments lacked support and in some instances were inconsistent
with available cost information. In aggregate, these improper cost
adjustments, and other deficiencies in the Company’s raw material
costing methodology, overstated the Company’s fiscal year 2015
income before taxes by $5.9 million.
Other Improper Accounting
Lease Accounting
21. As part of its operations, ADS leases significant amounts of
equipment. Since at least 2010, the Company had improperly
accounted for many of its equipment leases as operating leases, and
not capital leases, based largely on the minimum payment terms for
the initial twelve-month non-cancellable period of the leases.
However, ADS did not consider other relevant lease terms and
conditions in its operating or capital classification
determination. ADS subsequently determined that the Company’s lease
accounting did not comply with GAAP [ASC 840]. Under GAAP, most of
the Company’s equipment leases should have been accounted for as
capital leases. This accounting error had the effect of
understating the Company’s net property, plant and equipment in
2013, 2014, and 2015 by $58 million, $64 million, and $73 million,
respectively, understating its financing obligations by $38
million, $46 million, and $61 million, respectively, and
overstating its income before taxes by $3.1 million, $2.4 million,
and $5.1 million, respectively.
Volume Rebate Liability
22. ADS offered rebates to many of its high-volume customers. The
Company accrued monthly for its estimated rebate liabilities.
Following the end of fiscal year 2015, a member of the ADS
accounting group, using a newly developed methodology, estimated
that ADS’s rebate liability was under accrued by approximately $1.4
million. A subsequently prepared reconciliation schedule indicated
it should be adjusted upwards by approximately $845,000. The
Company did not use either of these calculations to adjust the
rebate liability account at year-end, and instead, without support,
recorded only a partial adjustment of $400,000. The Company later
determined, in connection with the Restatement, that the volume
rebate account was under accrued by $3.5 million at the end of
fiscal year 2015.
Tone at the Top and Other Accounting Control
Deficiencies
23. The material misstatements and improper accounting described
above were due in part to insufficient internal accounting
controls. As ADS acknowledged in its Restatement, the poor “tone at
the top” set by senior management contributed to the Company’s
ineffective internal accounting controls. Senior management also
created a high pressure environment for accounting personnel, and
there was an inappropriate emphasis on aggressive and arbitrary
timelines. Sturgeon and others in the finance department managed
ADS’s accounting in a topdown manner, overriding accounting
policies and calculations by accounting personnel and directing or
approving entries without adequate documentation. All of these
factors led to an environment where many employees felt there was
no meaningful way to challenge accounting instructions and entries
with which they disagreed.
24. ADS also lacked accounting personnel with appropriate
experience and training. The Company also had insufficient internal
accounting controls over: inventory and lease accounting;
segregation of accounting entry and approval duties; and
documentation requirements for journal entries. These deficiencies,
and others, contributed to the improper accounting and material
misstatements of the Company’s financial results described
above.
The Offer and Sale of Securities
25. ADS offered and sold securities pursuant to an Amended Form S-1
the Company filed on July 14, 2014, that went effective on July 24,
2014. This registration statement contained inaccurate financial
statements for fiscal years 2013 and 2014, which the Company later
corrected. ADS also offered and sold securities pursuant to a Form
S-8 the Company filed on July 30, 2014, as a result of employee
exercises of stock options during fiscal year 2015. The Form S-8
incorporated by reference ADS’s subsequent periodic filings under
the Exchange Act, including the quarterly filings during fiscal
year 2015, which the Company later restated. In May 2015, Sturgeon
sold a total of 50,000 shares of ADS common stock on the open
market.
ADS’S REMEDIAL EFFORTS
26. In determining to accept ADS’s offer, the Commission considered
remedial acts promptly undertaken by ADS and cooperation afforded
the Commission staff.
Medical cost:
15.The estimation made by ADS for medical cost for its employees is done on monthly basis which get adjusted as when actual cost occurs by employee. Company policy is to capitalize pension cost in inventory medical cost related to manufacturing which become part of Cost of good sold and to expense it in SG & A medical cost related to non manufacturing operations which will ultimately affects the overall profit of the ADS Here, the policy adopted by company is not as per accounting guidelines since it should be adjusted from the liabilities created for pension payable to employees which depends whether its a defined benefit plan or defined contribution plan.
16. In March 2015, the actual medical cost exceeds the companies accrual by $552000 persuant to companies policies it shall be apportioned between manufacturing and non manufacturing cost. Strugeon directed to improperly capitalize the entire amount to manufacturing cost into inventory which led to overstatement to companies earning.
17. In following month ADS personnel determined that the actual medical cost is $592,000 less than the accrued which strugeon directed to credit it to SG & A accounts improperly resulting the overstatement of companies earnings since it understated SG & A expense account by $401,000.
18. ADS policy was to capitalize in inventory freight cost for the amount incurred in inter company transfers of inventory. Two improper entries were made: 1) Increase capitalized Freight cost by corresponding decline in COGS by $500,000. 2) Increasing the freight account correspondingly decreasing COGS account without proper support documents by $296,000 which overstated the companies income before taxes by $796,000.
19. ADS’s accounting practice was to make an accounting adjustment to inventory, and corresponding adjustment to COGS, to reflect any changes to the inventory balance resulting from the updated standard costs and also maintained an inventory reserve account to reflect changes between standard and actual costs without adeqaute corroboration which led inaccuracies in financial statement.
20.Sturgeon updated many of the Company’s standard costs, resulting in a material increase in inventory and corresponding reduction in COGS. Deficiencies in the Company’s raw material costing methodology, overstated the Company’s fiscal year 2015 income before taxes by $5.9 million.Due to improper accounting without proper support of documents.
21.The Company had improperly accounted for many of its equipment leases as operating leases, and not capital leases, based largely on the minimum payment terms for the initial twelve-month non-cancellable period of the leases without considering other lease terms & conditions and also does not comply with GAAP. which should have been accounted under capital lease.
This accounting error had the effect of understating the Company’s net property, plant and equipment in 2013, 2014, and 2015 by $58 million, $64 million, and $73 million, respectively, understating its financing obligations by $38 million, $46 million, and $61 million, respectively, and overstating its income before taxes by $3.1 million, $2.4 million, and $5.1 million, respectively.
22. It offered rebates to many of its high-volume customers which is estimated that ADS’s rebate liability was under accrued by approximately $1.4 million. Recorded only a partial adjustment of $400,000 against $845,000 which is calculated as per reconciliation schedule.The Company determined that the volume rebate account was under accrued by $3.5 million at the end of fiscal year 2015.
23. Due to high pressure environment for accounting personnel there was an inappropriate emphasis on aggressive and arbitrary timelines. Accounting in a topdown manner, overriding accounting policies and calculations by accounting personnel and directing or approving entries without adequate documentation factors led to an environment where employees agreed to record entries in inappropriate manner.
24. Lack of proper training and experience of the employees led to such in appropriate accounting and material misstatements.
25. ADS offered and sold securities that went effective on July 24, 2014. This registration statement contained inaccurate financial statements for fiscal years 2013 and 2014, which the Company later corrected. Employees also exercises stock options during fiscal year 2015. Sturgeon sold a total of 50,000 shares of ADS common stock on the open market.
Please help me analysis this article Medical Costs 15. ADS also accrued monthly for estimated medical...
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