The Hain Celestial Group recently settled charges with the Securities and Exchange Commission resulting from weaknesses in its internal controls. Why the food company was not assessed a monetary penalty is where the compliance lessons lie.

According to the SEC’s order, between 2014 and 2016, sales personnel for Hain Celestial offered the company’s two largest distributors incentives at the end of fiscal quarters to encourage the purchase of sufficient inventory for Hain to meet quarterly internal sales targets. The incentives offered by Hain Celestial included rights of return for products that spoiled or expired before they were sold to retailers, as well as cash incentives of up to $500,000, substantial discounts, and extended payment terms.

According to the SEC's order, some of the incentives were agreed to orally and not documented, and others were documented only in e-mail exchanges with the distributors. The SEC’s order found that the company lacked sufficient policies and procedures to ensure the incentives were properly documented and accounted for and that Hain Celestial’s finance department was not aware of the quarterly incentive practices until May 2016.

After its finance department discovered the existence of the sales incentive practices, Hain Celestial undertook an internal investigation. In August 2016, the company self-reported to the SEC its discovery of the sales incentives and announced it was delaying its financial reporting for 2016. Ten months later, Hain reported that financial restatements were not required and simultaneously disclosed material weaknesses in its internal control of financial reporting.

Compliance lessons

According to the SEC order, in determining to accept the offer, the Commission considered remedial acts promptly undertaken by Hain Celestial and the cooperation it afforded the Commission staff.

Specifically, Hain Celestial promptly self-reported to the Commission and assisted with the Commission’s investigation, “including by providing regular updates and analyses related to its internal investigation,” the SEC order states. “Hain’s actions in this regard were important in the determination not to impose a penalty.”

Hain Celestial also made several organizational changes, including hiring staff in compliance positions and establishing an internal audit function. The SEC also credited Hain Celestial with implementing changes to its revenue recognition practices, including:

  • Revisions to its revenue recognition policies and procedures;
  • Standardization of its contract documentation and revenue analyses;
  • Revisions to its review process and monitoring controls over contracts with customers, customer payments, and incentives;
  • Changes in its communication function related to contractual modifications, between those involved in the sales process and those in corporate finance; and
  • Developing a revenue recognition and contract review training program.

“Hain’s internal control failures and poor documentation of the sales incentives contributed to the delay in its financial reporting, but the terms of our final settlement take into account Hain’s timely self-reporting, its cooperation during our investigation, and the significant changes it voluntarily made to its organization and to its revenue recognition practices,” said Carolyn Welshhans, associate director of the SEC’s Division of Enforcement.

The SEC’s order finds that Hain Celestial violated books and records and accounting controls provisions of the federal securities laws, and orders it to cease and desist from further violations. The company consented to the SEC’s order without admitting or denying the findings.