UNDER ARMOUR UNDER PERFORMS

Brief Summary:

In May 2021, Under Armour agreed to pay $9 million to settle charges with the Securities and Exchange Commission (SEC) for misleading investors regarding the basis for revenue growth and failing to disclose known uncertainties about future revenue prospects.

According to the SEC, for six consecutive quarters, beginning in the third quarter of 2015, Under Armour pulled forward a total of $408 million in existing orders that customers had requested to be shipped in future quarters and then misleadingly attributed revenue growth to a variety of factors, without explicitly disclosing the impact of the pull forward practices on revenue.

By pulling forward revenue transactions, Under Armour was able to meet analyst forecasts in the third quarter of 2015 that internal revenue growth forecasts had indicated would not otherwise have been met. Under Armour reported at least 20% revenue growth for 26 straight quarters, ending in the final quarter of 2016 when Under Armour reported only a 12% sales growth for the quarter.

The SEC began investigating Under Armours revenue practices in 2017 and in 2020 served Under Armour and the CFO at the time, David Bergman, with a Wells Notice. A Wells Notice is not a formal charge, nor is it a final determination that a law has been violated, but rather a formal notice that the SEC staff investigating have recommended the SEC file an enforcement action alleging violations of federal law.

Pulling forward sales does not explicitly violate GAAP, as it reflects goods that actually are sold, however, the SEC alleged Under Armour violated federal securities law when they failed to disclose these practices to investors.

Under Armour did not admit or deny the SECs findings, however they have agreed to cease and desist from further violations.

References:

Under Armour Founder Sold $138 Million in Stock During Time Period Company Allegedly Misled Investors about Slowing Sales The Washington Post, May 13, 2021

SEC Charges Under Armour Inc. With Disclosure Failures SEC Press Release 2021-78, May 2, 2021.

Under Armour Shares Fell After Founder, CFO Named In SEC Probe Forbes, July 27, 2020

Inside Under Armours Sales Scramble: Pulling Forward Every Quarter The Wall Street Journal, November 14, 2019

Under Armour is Subject of Federal Accounting Probes The Wall Street Journal, November 4, 2019

Questions:

1) Considering the auditor as a financial accounting expert:

a) What is the basic criteria for recognizing revenue in accordance with GAAP?

b) How do pull forward sales meet those criteria, or in your opinion, do they not?

2) PwC has served as Under Armours auditor since 2003. In your opinion, should PwC also be facing enforcement action from the SEC? Why or why not?

3) If the auditor was determined to have some liability in this situation, Under Armours alleged accounting improprieties relate to what management assertion?

Attach other references if you can please