The SEC has just settled an action against Diageo PLC, a producer of liquor, wine and beer, for failure to disclose known trends and uncertainties. Diageo’s omission resulted in materially misleading disclosures regarding its financial results and material inflation of key performance indicators—organic net sales growth and organic operating profit growth. It’s worth noting that the SEC has not been reluctant to take enforcement action against companies that have misled investors by inflating KPIs, such as subscriber counts, revenue-per-subscriber, number of vehicles sold monthly, net new customers added, backlog and now organic net sales growth and organic operating profit growth. These types of metrics—typically outside of the financial statements—are metrics on which investors and analysts often rely to assess performance, and companies have been held to account if their presentations are materially inaccurate or misleading or the related controls are inadequate.
Faced with declining market conditions, employees of the company’s North American subsidiary (DNA) engaged in “channel stuffing,” pushing shipments of unneeded inventory to third-party distributors. These actions were part of an effort to meet performance targets and report higher growth in particular KPIs that were closely followed by analysts and investors. With distributors overstocked with excess inventory, sales were highly likely to decline in the future—a known trend that the company failed to disclose, in part because of inadequate procedures. According to the SEC, the failure to disclose the channel stuffing meant that the company’s financial results were material misleading and the KPIs materially inflated.
