Following the second restatement of earnings and adjusted intersegment transactions, Archer Daniel Midland Company (ADM) is facing investigation by both the Department of Justice and the Securities and Exchange Commission. At issue is the apparent manipulation of costs and revenue among operating units between 2018 and 2023 to the benefit of the Nutrition Segment. It is alleged that the Carbohydrate Solutions and Agricultural Service and Oil Seeds components of the Company transferred products at preferential cost to Nutrition to boost the profitability of this operating segment. This in itself could be regarded as an internal company matter having bearing on corporate strategy, structure, use of assets, and compensation of managers. A line was crossed by CEO, Juan Luciano, who promoted the future of the Nutrition segment that he characterized as a potential future driver of profitability. The Nutrition unit was intended to develop specialty ingredients for human nutrition, and animal feed.
Apparently, ADM pegged bonuses to paper profitability of the segment, resulting in predictable distortions of interdivision profit. The SEC inquiry is intended to determine whether shareholders were misled. The Department of Justice probe will determine whether there was any evidence of conspiracy to commit fraud or deliberate misrepresentation.
The distortion of intersegment costs boosting Nutrition did not materially affect the company bottom line following a restatement of transactions. In commenting on the sequence of events, Bruce Dubinsky, a forensic accountant, stated, “If companies make accounting adjustments to boost earnings of a division for any reason, whether for executive compensation or because they have touted the unit as the future of the company, it goes from puffery to fraud.” According to Reuters, ADM employees confirmed that they were pressured by senior management to favor Nutrition and to meet profit forecasts that were regarded by insiders as unrealistic.
Monish Patolawala, recruited in July as Executive Vice President and CFO, has pledged to “make integrity and accuracy in our internal controls and financial reporting a top priority”. ADM has been and continues to fully cooperate with the Department of Justice and the U.S. Securities and Exchange Commission.
It is apparent that CEO Luciano placed considerable emphasis on the success of the Nutrition segment that even became a 2022 Harvard Business School case study. Evidently, Luciano misread the future of plant-based protein and was wrong in regarding the unit as a future major contributor to profit. It is now up to Federal agencies to determine if he and his subordinates contravened laws. At the very least the Board should be questioning his judgment, possible complicity in creative accounting and the culture of the company under his leadership. Canning Vikram Luther as a scapegoat in January would be an inadequate response. Clawback of inappropriately earned bonuses is suggested in part to compensate shareholders for substantial losses sustained when the news of the accounting irregularities surfaced. As the Brits would say “ADM has form,” given their involvement in collusion to fix the price of lysine three decades ago resulting in jail time for some executives and a $100 million fine.