Under Armour Under DOJ and SEC Investigation For Revenue Recognition Scheme
The Justice Department and the SEC have launched criminal and civil accounting fraud investigations against Under Armour. The sportswear maker has been suffering a rapid revenue decline over the last few years. The allegations focus on Under Armour’s accounting practices and shifting of sales from quarter to quarter to present a healthier picture of its finances than was actually occurring.
Under Armour Culture Problems
Over the last two years, Under Armour has been suffering from public reputational and culture issues, which eventually connected to its questionable accounting practices.
Last year, Under Armour suffered serious reputational damage from complaints by former and existing employees concerning its corporate culture, including expensing of strip-club visits and inappropriate conduct by executives.
Under Armour suffered from complaints by more than a dozen women who were subjected to demeaning and inappropriate conduct. Some of the male executives invited women to company events based on their attractiveness and potential appeal to male guests. Under Armour has attempted to transform and remediate its cultural problems.
Under Armour employs approximately 14,000 people. Since 1996, Under Armour has grown rapidly, eventually reaching annual revenue of around $5 billion.
Over the course of its growth, Under Armour has suffered from a male-dominated culture that suffered from serious reputational issues. The CEO’s brother left the company in 2012 after allegations of sexual misconduct were raised against him. Under Armour’s co-founder had an inappropriate relationship with a subordinate.
As an example of Under Armour’s cultural problems, the CEO held an annual event at a Maryland horse farm before the Preakness Stakes in Baltimore, Maryland. The invitations were limited to executives but included young female staffers based on attractiveness to appeal to male guests. The event managers referred to this practice as “stocking the pond.” Some employees reported their concerns because the company brought in go-go dancers to perform at the event.
Under Armour also had to formally prohibit employees use of expense accounts to pay for strip clubs in Baltimore. Apparently, employees charged hundreds of dollars to their expense accounts and were reimbursed for these expenses.
Several Under Armour female executives have left the company. Such departures reflected their own concerns with Under Armour’s male-dominated culture.
Under Armour Accounting Practices
Under Armour’s revenue recognition practices focused on quarterly reporting — whether it recorded revenue before it was earned or deferred the dating of expenses to make earnings appear higher.
Under Armour has suffered from declining sales over the last two years. Before that, it had experienced consistent growth over 26 straight quarters. That streak ended at the end of 2016 when it missed its sales target. Under Armour has had three CFOs over a two year period from 2016 to 2017. Under Armour also has lost market share to Nike and Adidas. Its stock has recently fallen 12 percent.
Under Armour’s long-time CEO has stepped down after more than 20 years with the company.
Under Armour is cooperating with the investigation. DOJ’s participation reflects the seriousness of the allegations and potential criminal liability for executives and others at the company.
Federal investigators are probably focusing on revenue recognition issues relating to sales and expenses incurred by Under Armour and its distributors. These transactions raise serious risks as to revenue recognition and the potential harm from so-called “side deals” with distributors.