The financial website MarketWatch is once again questioning the accounting practices of Brown-Forman Corp., citing experts who say the earnings reports of the Louisville-based spirits giant do not follow guidelines laid out last year by the Securities and Exchange Commission. However, a spokesman for the company strongly disagrees with the assertions of the publication, calling one particular suggestion that it inflated earnings “insulting” and “grossly inaccurate.”
In May of 2016, the SEC set out that companies’ financial reports must show earnings numbers prepared according to General Accepted Accounting Principles (GAAP) before any adjusted non-GAAP numbers — which often appear more favorable — and that these GAAP figures be emphasized equally.
In August of last year, a MarketWatch article suggested that Brown-Forman had run afoul of these guidelines in a quarterly earnings report, almost exclusively referring to the non-GAAP figures as their “underlying” numbers documenting net sales, gross profit, expenses and operating incomes. At the time, Brown-Forman defended its transparency and noted that they “have consistently reported in this way for more than a decade.”
This past weekend, a MarketWatch article again took issue with Brown-Forman’s most recent quarterly earnings report press release, noting that while the term “GAAP” does not appear until the footnotes to its table — which are in a smaller font — the term “underlying” is used 77 times to describe the company’s non-GAAP metrics on sales, profit, expenses and operating income. (As Insider reported, the company said it had a strong quarter.) The story cited the publisher of Accounting Observer as saying “it’s almost as if they don’t think the SEC’s non-GAAP guidelines apply to them,” and that “if their products were nothing but ‘underlying,’ they’d be shipping corn instead of bourbon.'”
MarketWatch searched other public companies’ disclosures to find that Brown-Forman was unique in using such terminology, also citing accounting experts who said it did not fully identify and reconcile the differences between the GAAP and non-GAAP figures and questioned whether its inventory was improperly adjusted under SEC rules to improve results at the end of a quarter or year.
Phil Lynch, a spokesman for Brown-Forman, emailed to IL a defense of the company’s accounting practices related to GAAP reporting guidelines, stating that they have been consistent for more than a decade and their “underlying” results weren’t always better than the “reported” GAAP results.
“Brown-Forman believes that its consistent approach of supplementing its GAAP results with non-GAAP ‘underlying’ results is in compliance with the SEC’s requirements, including its recent guidance,” stated Lynch. “The reasons why management believes these clearly labeled non-GAAP measures are useful to investors are disclosed in each of our earnings releases as well as reconciled to the GAAP results, as required by SEC rules.”
As for the suggestion in the MarketWatch article that Brown-Forman inventory adjustments might be part of a “channel stuffing” scheme — in which a company inflates sales and earnings by sending retailers more products than they are able to sell to the public — Lynch “vehemently” rejected the charge, stating that Brown-Forman “has been a paragon of integrity for nearly 150 years and we find the MarketWatch allegation insulting as well as just plain grossly inaccurate.”
“We believe that the non-GAAP disclosures in our earnings releases reflect well the spirit of the SEC’s rules related to non-GAAP measures,” said Lynch. “We strongly disagree with MarketWatch’s assertion that our presentation has the ‘potential to mislead’ in any way. Brown-Forman has been presenting its GAAP and non-GAAP results to analysts and investors for years, and we believe that there is no confusion.”
Since last May, the SEC’s Division of Corporation Finance has sent hundreds of letters to companies pointing out their noncompliance with their new guidelines on GAAP reporting, urging them to update their accounting practices. Lynch says that Brown-Forman has not received any noncompliance letters from the SEC since that time related to the guidelines highlighted in the MarketWatch story.
This story has been updated with additional responses from the spokesman of Brown-Forman.