Following a string of accounting and reporting problems, Kraft Heinz Co. disclosed it is under investigation by the Securities and Exchange Commission and reported a seemingly unrelated $15.4 billion impairment charge.
With its fourth-quarter and full-year 2018 financial results, Kraft Heinz said it received a subpoena from the SEC in October 2018 related to an investigation into the company’s procurement practices. The probe is focused on the company’s accounting policies, procedures, and internal controls related to procurement, including an examination of side agreements and changes to its agreements with vendors.
While cooperating with the SEC investigation, the company said it also launched its own internal review and determined it should record a $25 million increase to the cost of products sold as an out-of-period correction. According to an analysis by Audit Analytics, the $25 million correction would not be regarded as material, as it represents about 1 percent of the company’s 2018 year-end inventory balance.
“The company is in the process of implementing certain improvements to its internal controls to mitigate the likelihood of this occurring in the future and has taken other remedial measures,” Kraft Heinz said in its disclosure. The SEC has signaled to companies it is planning to keep a close eye on internal controls, especially as companies transition to major new accounting standards on revenue recognition and leases.
Separate from the procurement issue, Kraft Heinz also recorded a $15.4 billion markdown related to goodwill in its U.S. refrigerated and Canada retail business units and related to certain intangible assets, especially its Kraft and Oscar Mayer trademarks. The charges resulted in a net loss of $12.6 billion, the company said.
Kraft Heinz has recorded a number of smaller impairments in recent periods—$164 million and $215 million in August 2018 and $49 million in February 2018, for example. The company also revised three quarterly reports from 2017 in mid-2018 to correct immaterial errors in inventory and revenue recognition.
The company also reported weaknesses in internal control over financial reporting in 2017 related to difficulties with applying accounting requirements on classification of certain cash receipts and cash payments. In late 2017, the company restated financials to correct material errors related to classifications in the cash flow statement.