Accounting & Tax

ConAgra Settles with SEC for $45 Million

Regulator says the food company's misuse of reserves and improper revenue recognition amounted to accounting fraud.
Stephen TaubJuly 25, 2007

ConAgra Foods has agreed to pay $45 million to settle civil charges that in engaged in improper and fraudulent accounting practices.

The SEC accused the food company of misusing corporate reserves to manipulate reported earnings in fiscal 1999 and engaging in a scheme at its former subsidiary, United Agri-Products (UAP), in 2000 that involved, among other things, improper and premature revenue recognition.

“This case again illustrates that the Commission will take strong action when a company and its officers engage in accounting fraud that distorts the company’s true financial condition,” said Linda Thomsen, Director of the Commission’s Division of Enforcement. “The facts here are particularly troubling because of the number of different improprieties engaged in by Con Agra, the length of time over which they occurred, and the fact that senior management was involved in the misconduct.”

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

The SEC also alleged that from 2002 to 2005, ConAgra’s corporate tax department made numerous tax errors, causing the company to improperly account for tax benefits and understate its income tax expense.

The company has already restated its financial statements for the years 1999 through 2005.

According to the SEC’s complaint, ConAgra would have missed the Wall Street analysts’ consensus estimates of the company’s earnings per share for at least six of eleven fiscal quarters in fiscal years 1999, 2000 and 2001 had it not engaged in improper and, at times, fraudulent accounting practices.

ConAgra’s reserves misconduct in 1999 caused it to overstate annual reported income by 15 percent and to overstate earnings per share by more than 10 cents per share, the SEC said. Between the first quarter of fiscal year 1999 and the third quarter of fiscal 2001 ConAgra misstated its reported income before income taxes by nearly $218.5 million, according to the SEC.

In 2000, the UAP misconduct caused ConAgra to overstate its agricultural products segment’s operating profit by about 35 percent and ConAgra’s reported income before income taxes by 7.85 percent. As a result of the income tax errors, ConAgra misstated its reported income tax expense by $105 million.

Under its settlement, ConAgra, without admitting or denying the allegations in the complaint, agreed to be permanently enjoined from violating the antifraud, reporting, books and records and internal controls provisions of the federal securities laws. It also has consented to a review by an independent consultant of its policies and procedures and financial and accounting compliance functions with respect to certain reserve accounts.

Earlier this year, the Commission settled charges with six former ConAgra executives, and against two senior executives at UAP. Litigation is currently pending against a third UAP senior executive.

The ex-officials included former CFO James O’Donnell, former corporate controllers Jay Bolding and Kenneth DiFonzo, and former vice president for taxes Debra Keith. Harry Hill, the former director of corporate accounting, and Dwight Goslee, the former executive vice president of operations, were also hit with administrative bans and penalties.

The SEC charged that in 1999, DiFonzo, the former controller, improperly directed certain accounting practices linked to the setting up and using excess tax, interest, and purchase-accounting reserves, as well the use of a reserve account as a “cookie jar.”

After the end of the third quarter of fiscal 2000, Bolding, the other ex-controller, offset $6 million of unplanned-for and unreserved-for losses in a joint venture with a dollar-for-dollar reduction in an excess-reserve account, according to the complaint.

Near the end of the fourth quarter of fiscal 2000, Bolding cut excess legal and environmental reserves to offset more than $5.4 million in unexpected losses spawned by a ConAgra Frequent Flyer Miles promotion, according to the SEC. In the fourth quarter of that fiscal year, Bolding improperly slashed a fiscal year 1996 restructuring reserve by $24.4 million.

In fiscal 2004, Keith improperly calculated the stock basis following the sale by ConAgra of several beef/pork subsidiaries and, as a result, incorrectly determined that the sale had resulted in a capital loss for tax purposes, according to the complaint.

Hill, at the request of DiFonzo or Bolding, signed journal entries that improperly cut or allocated certain excess reserve accounts from fiscal year 1999 through fiscal year 2001, the SEC alleged.

Without admitting or denying the charges, O’Donnell, Bolding, and DiFonzo each consented to refrain from violating and aiding and abetting violations of a number of reporting, books and records, and internal controls provisions of the federal securities laws. Keith, without admitting or denying the commission’s allegations, also consented to refrain from violating various reporting and record-keeping provisions.

Further, O’Donnell agreed to pay more than $717,000, Bolding consented to pay over $600,000, DiFonzo agreed to pay $139,988 and to divest 20,192 unexercised ConAgra stock options.

Keith agreed to disgorge $132,456 and the monetary value of 2872 shares of ConAgra stock, to pay $19,225 in prejudgment interest, to divest 866 unexercised ConAgra stock options, and to pay a civil penalty of $60,000.

Bolding and DiFonzo also agreed to be suspended from appearing or practicing before the commission as accountants, with the right for reinstatement after one year.

In a separate civil action, Hill agreed to pay disgorgement of $10,463, plus $4,756 of prejudgment interest, and a $20,000 civil penalty, while Goslee agreed to pay a $45,000 civil penalty.

4 Powerful Communication Strategies for Your Next Board Meeting