In May 2021, Under Armour agreed to pay $9 million to settle charges with the Securities and
Question:
In May 2021, Under Armour agreed to pay $9 million to settle charges with the Securities and Exchange Commission (SEC) for misleading investors regarding the basis for revenue growth and failing to disclose known uncertainties about future revenue prospects.
• According to the SEC, for six consecutive quarters, beginning in the third quarter of 2015, Under Armour “pulled forward” a total of $408 million in existing orders that customers had requested to be shipped in future quarters and then misleadingly attributed the revenue growth to a variety of factors, without explicitly disclosing the impact of the pull forward practices on revenue.
• By pulling forward revenue transactions, Under Armour was able to meet analyst forecasts in the third quarter of 2015 that internal revenue growth forecasts had indicated would not otherwise have been met. Under Armour reported at least 20% revenue growth for 26 straight quarters, ending in the final quarter of 2016 when Under Armour reported only a 12% sales growth the quarter.
• The SEC began investigating Under Armour’s revenue practices in 2017 and in 2020 served Under Armour and the CFO at the time, David Bergman, with a Wells Notice. A Wells Notice is not a formal charge, nor is it a final determination that a law has been violated, but rather a formal notice that the SEC staff investigating have recommended the SEC file an enforcement action alleging violations of federal law.
• Pulling forward sales does not explicitly violate GAAP, as it reflects goods that actually are sold, however, the SEC alleged Under Armour violated federal securities law when they failed to disclose these practices to investors.
• Under Armour did not admit or deny the SEC’s findings, however, they have agreed to cease and desist from further violations.
Questions:
1) Considering the auditor as a financial accounting expert:
a) What are the basic criteria for recognizing revenue in accordance with GAAP?
b) How do pull forward sales meet those criteria, or in your opinion, do they not?
2) PwC has served as Under Armour’s auditor since 2003. In your opinion, should PwC also be facing enforcement action from the SEC? Why or why not? 3) If the auditor was determined to have some liability in this situation, Under Armour’s alleged accounting improprieties relate to what management assertion?
Financial Reporting and Analysis
ISBN: 978-1259722653
7th edition
Authors: Lawrence Revsine, Daniel Collins, Bruce Johnson, Fred Mittelstaedt, Leonard Soffer