ADM has yet to get a handle on accounting months after scandal

Almost 10 months after a scandal that shook Archer-Daniels-Midland Co., the commodity-trading giant is still struggling to sort out its accounting.

ADM, which in March adjusted its financial disclosures going back to 2018, said late Monday that it found more errors in the way it reported transactions between its business units. The crop trader said it will restate results for last year and the first and second quarters of 2024. The move prompted ADM to cancel its quarterly earnings call with analysts only 14 hours before it was due to start. 

The Chicago-based company said it will make the formal corrections “as soon as reasonably practicable,” and it doesn’t expect any material impact from the changes. But even as the financial impact of the errors on consolidated earnings have so far been minor, the broader consequences could be significant as investors lose confidence in the company.

ADM has erased almost $12 billion in market value since the accounting issues first became public in January. The stock plunged as much as 12% on Tuesday to the lowest level since December 2020, heading for its worst annual performance in almost a decade. The scandal has drawn investigations by the Department of Justice and Securities & Exchange Commission, and the company removed Vikram Luthar from the Chief Financial Officer role. 

ADM said earlier this year it has identified “material weakness” in its internal controls over financial reporting of transactions between units, which totaled roughly $4.4 billion last year. The newly identified errors were found as the company started testing new controls — a process it said will continue through the end of the year. The decision to formally restate previous financial statements was taken by ADM’s board after discussions with the SEC.

Representatives for ADM and the SEC each declined to comment.

Assessing whether errors are significant requires considering a broad mix of information, not just numbers, according to SEC guidance. A small numerical error can become serious if it affects compliance with loan covenants, changes earnings, or boosts executive pay, among other factors.

“It is entirely possible for something to not be quantitatively material and yet still be qualitatively material,” said Bruce Pounder, founder of GAAP Lab, an accounting advisory firm. 

The restatement of information about the so-called inter-segment transactions raises concerns that profits from the nutrition unit may be lowered further. ADM has spent billions expanding the business since 2014, when it made its biggest-ever acquisition — the $3 billion buyout of European natural ingredient maker Wild Flavors GmbH — in a bid to diversify from row crop grains and oilseeds into processed products. Nutrition companies tend to trade at a premium to commodity traders because of their higher growth potential and increased earnings stability.

ADM also spent about $1.8 billion to buy animal feed maker Neovia from France’s InVivo Group in 2019. But profits have failed to live up to initial expectations due to weakening demand, including for plant-based food.

This isn’t the first scandal involving ADM. Back in the 1990s, it was implicated in a price-fixing conspiracy that later became the basis of the 2009 film “The Informant!” starring Matt Damon. ADM pleaded guilty to the price-fixing charges in 1996. The company has also responded to a lawsuit over allegations of price manipulation involving its trading of ethanol. 

The renewed accounting issues come at a time when ADM is struggling with a drop in crop prices around the globe and lower profits from processing soybeans into meal and oil — a key earnings driver amid increased crushing capacity in the U.S. A surge in imports of ingredients such as tallow and waste oil has also impacted demand for soybean oil for biofuel production. ADM closed its only soybean crushing facility in Iowa for maintenance during the current harvest of a record U.S. crop, further eroding its ability to gain from processing.

ADM was expected to release its third-quarter financial statement on Tuesday before the start of trading. In the surprise preliminary report late Monday, the company said earnings excluding some items slumped 33% from a year ago to $1.09 per share. That missed even the lowest of analysts’ estimates compiled by Bloomberg. The company also wrote down the value of its investment in Wilmar International Ltd. by $461 million.

The trader slashed its full-year earnings outlook to a range of $4.50 to $5 per share, citing slower market demand, internal operational challenges as well as legislative and regulatory policy uncertainties. The company previously projected a profit between $5.25 and $6.25.