INVER GROVE HEIGHTS, MINN. — Financial statements issued by CHS, Inc. for the past four fiscal years “should no longer be relied upon,” according to an Oct. 26 filing by CHS with the U.S. Securities and Exchange Commission.
Following a review by its audit committee, the agricultural cooperative said it uncovered intentional misconduct by a former employee in its rail freight trading operations. CHS said it believes the employee’s actions led the cooperative to overstate its pretax income for the period from Sept. 1, 2014, through May 31, 2018, by approximately $100 million to $190 million.
Additionally, CHS said it believes its net assets were overstated by approximately $115 million to $220 million during the period in question.
“Management of the company initially noted potentially excessive valuations in the net derivative asset valuations relating to certain rail freight contracts purchased in connection with the company’s North American grain marketing operations,” CHS said in the Oct. 26 filing. “Following the company’s identification of these potentially excessive valuations, the company engaged Faegre Baker Daniels L.L.P., which engaged forensic accountants at Ernst & Young L.L.P., to work with management of the company, under the oversight of the audit committee, to conduct an investigation.
“Though the investigation remains ongoing, it has identified misstatements in the consolidated financial statements of the company included in the initial filings that are due to intentional misconduct by a former employee in rail freight trading operations, as well as due to certain freight auction contracts not meeting the technical accounting requirements to qualify as a derivative financial instrument. The misconduct consisted of the former employee manipulating the mark-to-market valuation of rail cars that were the subject of certain rail freight purchase contracts and manipulating the quantity of rail cars included in the monthly mark-to-market valuation. In addition, the investigation revealed intentional misstatements that were made by the former employee to PricewaterhouseCoopers L.L.P. in connection with its audit of the company’s consolidated financial statements for the fiscal year ended Aug. 31, 2017.”
CHS said that during the course of, and as a result of, the investigation, the former employee was terminated by the company. According to a Nov. 13 article in the StarTribune, Dan Mack, the company’s vice-president of rail transportation and terminal operations, also has resigned. Mr. Mack told the StarTribune he was not directly responsible for overstating the rail contracts and added that he “strongly supports CHS’s decision to terminate that employee.”
As a result of the identified misstatements, CHS said it will restate the previously issued consolidated financial statements. The cooperative said it hopes to have the restated financials ready by Nov. 29.
“While the investigation is not yet complete, findings to date indicate there was no monetary loss to CHS; however, the company will incur additional costs related to this matter,” the company said in a Nov. 15 statement issued to Milling & Baking News. “Any overstated non-cash values will be written off and reflected in the restated financial results. CHS is taking immediate action to assess and strengthen the company’s system of internal financial reporting controls. The company’s balance sheet remains strong.
“We take this seriously and have dedicated resources and time at the highest levels of our organization to this situation. We are taking immediate action to assess and strengthen the company’s system of internal financial reporting controls. While we cannot comment beyond the current public filings, we are deeply committed to integrity and transparency at all levels of our farmer-owned cooperative.”