Nutracea Financial Case Study

According to U.S. Securities and Exchange Commission’s Litigation Release No. 21819 and Accounting and Auditing Release No. 3234 dated January 20, 2011, on January 13th, 2011, SEC charged NutraCea, three former executives, and two former accounting personnel for overstatement of NutraCea's product sales revenues by employing deceptive accounting schemes.
NutraCea is an Arizona-based company that manufactures and sells health food products. For the second and third quarters of its fiscal year 2007 and the fiscal year of 2007 NutraCea allegedly overstated its sales revenue in its financial statements by reporting deceptive sales and applying inappropriate revenue recognition practices and concealing its factual operating results.
The SEC charged
Edson, former chief financial officer, Todd C. Crow, former senior vice president and secretary, Margie Adelman, former controller, Joanne D. Kline, and former director of financial services, Scott Wilkinson for their roles in the improper accounting and the fraudulent accounting scheme.
The related SEC complaint for the violations of the Federal Securities law also states that in order to support the false sales figures to Bi-Coastal, the former CEO instructed Bi-Coastal's president to falsify his family's financial statements to reflect a higher net worth. In fact, Bi-Coastal's down payment for the $2.6 million sale came from NutraCea's former COO.
NutraCea also recorded revenue on a bill and hold transaction related to a $1.9 million sale of product to ITV Global, Inc. inaccurately, in the fourth quarter of 2007. Consequently, NutraCea overstated its product sales revenue by 36.8% for fiscal year end 2007 by falsifying Bi-Coastal and ITV Global transactions alone. These false revenues caused NutraCea to misstate its operating loss by over 89% in the second quarter 2007, over 17.6% in the third quarter 2007, and nearly 7% in fiscal year 2007.
The alleged employees agreed to settle the matter in the following
The former senior vice president, Adelman, consented to a final judgment permanently enjoining her from future violations of the Exchange Act, and for aiding and abetting violations of Sections 13(a) and consented to a five year officer and director bar. iv. The former controller, Kline and former director of financial services, Wilkinson, both consented to final judgments permanently enjoining them from future violations of Exchange Act, and for aiding and abetting violations of Sections 13(a) and also agreed to pay a civil penalty of $25,000 each. Both of them further consented to suspending each of them from appearing or practicing before the Commission as an accountant with the right to apply for reinstatement after one year.
The complaint against Crow, the former chief financial officer includes following allegations:
• Violation, aided and abet violations of the antifraud, books and records, financial reporting, internal controls, and lying to auditors provisions of the federal securities laws.
• Violation of Exchange Act Rule 13a-14 by signing certifications required by Section 302 of the Sarbanes Oxley Act that were false and misleading.
The SEC's complaint against Crow required a permanent injunction, a civil penalty, and an officer and director bar. The case against Crow was still ongoing at the date of this