Lesson 7 of 8
After the restatement
Hertz restated 235 million dollars of pretax income and disclosed eleven material weaknesses. Hain disclosed a practice and restated nothing. Read both endings.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- A restatement announcement has a form: a current report under Item 4.02 saying previously issued statements should no longer be relied upon.
- Hertz filed its restatement on 16 July 2015, covering 2012, 2013 and prior periods, reducing previously reported pretax income by 235 million dollars in total and identifying eleven material weaknesses.
- A disclosed problem does not always become a restatement: Hain Celestial self-reported in August 2016, took about ten months, concluded no restatement was required, and disclosed material weaknesses anyway.
Most of what a reader learns about manipulation, they learn after it is over. The documents that follow a problem are public, dated, and far more specific than anything written before it.
Two disclosures, two endings
Hertz: a restatement
- Misstatements from at least February 2012 through March 2014.
- Restatement filed 16 July 2015, covering 2012, 2013 and prior periods, with selected unaudited 2011 data.
- Previously reported pretax income reduced by 235 million dollars in total, including revisions made in early 2014.
- Seventeen areas of material accounting error and eleven separate material weaknesses identified.
Hain Celestial: no restatement
- Sales incentives given to certain distributors to promote sales at quarter ends, from at least 2014 until May 2016.
- Self-reported to the Commission in August 2016; fiscal 2016 reporting delayed.
- About ten months to conclude that no restatement was required.
- Material weaknesses in internal control over financial reporting disclosed in the fiscal 2016 annual report, filed June 2017.
Both companies disclosed, both disclosed material weaknesses in internal control, and only one restated. The disclosure is the event; the restatement is one possible outcome of it.
The announcement, and where it appears
The mechanism is a current report on Form 8-K under Item 4.02: a determination that previously issued financial statements should no longer be relied upon. That item exists for exactly this and nothing else, which makes it the single most informative item code in the form.
Item 4.01, a change of the registrant's certifying accountant, sits next to it and is worth reading in the same breath, because the two sometimes arrive in sequence.
What a restatement document actually contains
Four things, in the Hertz case as in most. The periods restated, here 2012, 2013 and prior periods with selected unaudited data for 2011. The size, here a reduction of 235 million dollars in previously reported pretax income once revisions made in early 2014 are included. The areas, here seventeen with material accounting errors across the business units. And the control findings, here eleven separate material weaknesses in internal control over financial reporting.
The order also records that the restatement acknowledged an inconsistent and at times inappropriate tone at the top, which may have contributed to errors, misstatements and omissions. That is the company's own characterisation, in its own filing.
The ending that is not a restatement
Hain Celestial's matter ran a different course. The Commission's settled order of 11 December 2018 describes sales incentives given to certain distributors to promote sales at the end of quarters, from at least 2014 until May 2016, with potential accounting implications.
The company self-reported the practice in August 2016 and delayed its fiscal 2016 reporting. It ultimately determined that no financial restatements were required, and the order states this took approximately ten months, given an internal review of a number of issues, inadequate documentation of the incentives, and insufficient internal accounting controls to give reasonable assurance that the incentives were accounted for correctly. Material weaknesses were disclosed in the fiscal 2016 annual report filed in June 2017.
Both companies consented to their orders without admitting or denying the findings.
The reader's takeaway
A delayed filing is information before any conclusion exists. Ten months between a disclosure and a determination is ten months in which the honest answer to "what are the numbers" is that nobody knows yet, and a figure carried forward from the last filing during that window is a figure whose own preparer has stopped standing behind the process that produced it.
Check yourself
Which Form 8-K item code announces that previously issued statements should no longer be relied upon?
- Item 4.01
- Item 4.02
- Item 5.02
Show the answer
Answer: B.
Item 4.02 is the non-reliance determination. Item 4.01 is a change of the registrant's certifying accountant, which sometimes arrives alongside it.By how much did the Hertz restatement reduce previously reported pretax income, and over what periods?
- By 17 million dollars, for 2014 only
- By 235 million dollars in total, covering 2012, 2013 and prior periods, including revisions made in early 2014
- By 2.35 billion dollars, for 2011 to 2015
Show the answer
Answer: B.
The order states a total reduction of 235 million dollars, a restatement filed 16 July 2015, seventeen areas of material error and eleven material weaknesses.What did the Hain Celestial matter end in?
- A restatement of four fiscal years
- A determination that no restatement was required, reached after about ten months, with material weaknesses disclosed
- A finding that the practice never occurred
Show the answer
Answer: B.
The order records self-reporting in August 2016, a delay to fiscal 2016 reporting, roughly ten months to conclude no restatement was needed, and material weaknesses disclosed in the annual report filed June 2017.Sources
- SEC, In the Matter of Hertz Global Holdings, Inc. and The Hertz Corporation, Securities Act Release No. 10601, Exchange Act Release No. 84979, Accounting and Auditing Enforcement Release No. 4012, 31 December 2018. Settled without admitting or denying the findings.
- SEC, In the Matter of The Hain Celestial Group, Inc., Exchange Act Release No. 84781, Accounting and Auditing Enforcement Release No. 3997, 11 December 2018. Settled without admitting or denying the findings.
- Form 8-K, Item 4.01 and Item 4.02: a change of the registrant's certifying accountant, and a determination that previously issued financial statements should no longer be relied upon.
- Section 404 of the Sarbanes-Oxley Act of 2002: the assessment of internal control over financial reporting, where a material weakness is disclosed.
What this leaves out
- Both matters were settled and the respondents consented without admitting or denying the findings, which are not binding on any other person or entity. Everything stated about either company comes from its order.
- The Hain Celestial matter ended without a restatement. Nothing here suggests otherwise, and neither company's later conduct is described.
- The worked example uses invented round numbers and is labelled illustrative.
- Nothing here is advice about any security.