Editorial: Crisis at Chicago corporate heavyweight ADM rekindles bad memories of accounting scandals of yore

Archer Daniels Midland may be just a vaguely familiar corporate name to a lot of Chicagoans but the commodities trader and food processor is the second largest publicly traded company based here — 35th overall on the Fortune 500 list — and it’s suddenly in trouble.

In corporate America, the chief financial officer’s standing often is as important as that of the chief executive officer. The CFO is in charge of the books and what’s reported to the public, and whenever there are questions about improprieties in disclosure at big publicly traded companies, alarm bells ring.

So shareholders didn’t wait to hear details before selling in droves when ADM on Sunday reported that it placed CFO Vikram Luthar on administrative leave and was investigating accounting practices in one of its key business units. The stock is down 25% since the news hit and is trading at levels last seen three years ago.

This century is littered with the casualties of accounting scandals. Think Enron and WorldCom. Locally, Waste Management, a corporate heavyweight based in the Chicago area for decades, was sold for cheap in the late 1990s to a Texas-based rival after cooking its books. The Waste Management name lived on, but the company is long gone from these parts.

Perhaps most brutal for Chicago was the implosion of Arthur Andersen, once the gold standard in accounting nationally with a massive local presence in its hometown and its suburbs. Andersen’s central involvement in the Enron scandal (Andersen also was Waste Management’s auditor during the accounting-fraud period) resulted in its demise in 2002, and thousands of highly paid white-collar workers lost their jobs.

That’s not in any way to suggest ADM’s issues, the depth and precise nature of which are as yet unknown, are on that level. ADM said the internal probe was launched only after the Securities & Exchange Commission made a voluntary document request. In such situations, it’s always best if the company itself discovers the problem and notifies the feds.

The questionable accounting issues, ADM said in a filing, are focused on its nutrition segment. That’s one of its smaller business units, accounting for 8% of revenue. But it’s also one of its most profitable and has been a strategic focus for a company desiring new growth vehicles outside of its traditional businesses of corn and soybean trading, processing of cooking oils and production of ethanol.

The unit focuses on products used in plant-based foods and has suffered over the past year as demand for plant-based meat has lagged. ADM’s stock price already had fallen 20% in the 12 months before this most recent crash. That was due in significant part to weakness in the nutrition segment.

In the company’s most recent conference call with analysts, which took place Oct. 24, CEO Juan Luciano took pains to portray the nutrition unit’s woes as “the pause that refreshes.”

“We’re very confident we’re going to go back to growth next year,” he said.

Scotch that outlook. Along with disclosing the accounting probe, the company said a few days ago that it was “withdrawing” its previous forecast for the nutrition business.

The pressures to produce from quarter to quarter at companies such as ADM are acute. They grow more so when a stock price is drooping the way it was late last year. Executives are tempted in such times to make a bad situation appear better than it is, and the mind-numbing vagaries of accounting offer many ways to do that.

In ADM’s case, executives’ own fortunes were tied in an unusual way to the nutrition segment’s success, Bloomberg reported. Beginning in 2020, operating-earnings growth targets became a key metric to determine the stock awards granted to the company’s top seven execs. They collected more than $70 million in such grants a year ago based strictly on the results in that relatively small unit over the previous three years.

That’s a recipe for accounting shenanigans. The pressure to get nutrition back on track surely was intense.

Still, Andersen, Waste Management, Enron et al are such horrifying cautionary tales that it’s a wonder we still see these corporate misadventures. The risk of exposure in a day and age in which information is so readily available doesn’t seem to justify pushing the number-crunching envelope.

Right now, Chicago can’t afford for any more companies to leave town — or for the ones here to stumble badly.

We’ll cross our fingers the ADM fallout proves limited. But, if real malfeasance took place here, then those in charge at ADM should pay the appropriate price.

Join the discussion on Twitter @chitribopinions and on Facebook.

Submit a letter, of no more than 400 words, to the editor here or email letters@chicagotribune.com.