Youngevity’s accounting auditor quits over misrepresentations
Youngevity’s long-term financial auditor has quit following concerns over provided financial data.
Citing “information that has come to its attention”, the firm Mayer Hoffman McCann has resigned as Youngevity’s accounting.
Mayer Hoffman McCann had been signing off on Youngevity’s filed financial reports since 2011.
What information Mayer Hoffman McCann have uncovered is not disclosed in Youngevity’s October 12th 8-K filing.
What we do know is Mayer Hoff McCann have no confidence in Youngevity management.
The internal controls necessary for Youngevity to develop reliable consolidated financial statements do not exist and that information has come to its attention that has led Mayer Hoffman McCann to no longer be able to rely on management’s representations.
Information provided by Youngevity in their 8-K filing suggests there’s a problem with revenue reporting tied to green coffee cost of sales.
Specifically, Youngevity representing that it owned coffee sold to H&H Export Y CIA. LTDA in Nicaragua in 2019.
During the 2019 audit procedures, the Company determined that the Company did not own the unprocessed green coffee prior to transferring the coffee to H&H and is therefore an agent and processor of green coffee on behalf of H&H.
This determination meant that revenues on green coffee transferred to H&H should have been recorded at net (the added value of the processing of the green coffee beans) rather than at gross, as previously reported.
The Audit Committee, following discussions with management, has determined that rather than recognizing revenues and cost of sales of green coffee to H&H on a gross basis, the revenues and cost of sales to H&H should be recognized on a net basis reflecting the deduction of cost of revenue related to such revenue.
The change in accounting for the revenues and cost of sales of green coffee to H&H from gross to net is not expected to have any impact on the Company’s net income/loss.
Consequently, Youngevity’s Audit Committee advises
unaudited condensed consolidated financial statements for the quarters ended March 31, 2019, June 30, 2019 and September 30, 2019 contained in the Company’s Quarterly Reports on Form 10-Q previously filed with the SEC on May 20, 2019, August 14, 2019 and November 18, 2019 should no longer be relied upon.
Similarly, related press releases, earnings releases, and investor communications describing the Company’s unaudited condensed consolidated financial statements for those periods should no longer be relied upon.
If I’m reading the filing collectively, Youngevity has also lost $5.3 million to H&H.
The Company also has recently determined that the value of the collateral underlying a promissory note, due November 2020, in the principal and interest amount of $5.3 million, from H&H has been impaired, resulting in an impairment allowance for $5.3 million.
As a result, management believes it is more than likely that the Company will not collect the outstanding balance and interest due on the note receivable.
Based on Youngevity’s representations in their filing, this is remedied by filing “restated condensed consolidated financial statements”.
First and foremost I’m not accountant. If Youngevity’s error was unintentional however, and all that’s needed to be done is refiling of financial reports – why would Mayer Hoff McCann terminate a nine-year contract?
Anyone with accounting experience able to weigh in and explain what I might be missing?
An auditors role is to verify the integrity of the financials, vouch for their accuracy, and be independent. Ultimately the financials and any associated adjustments to them must be approved by management (aka the company, board, audit committee, you name it).
In this case something came up and in all likelyhood they felt uncomfortable dealing with it, or didn’t come to a resolution and would not sign off on financials (with a qualified or unqualified opinion).
A few things to keep in mind
– It is a bad omen if an auditor resigns after starting the audit. This is an indication that the auditor has uncovered something very serious.
– Perhaps the auditor has lost trust in the board, there is a conflict of interest, an independence issue, or inducements by the board to perform illegal, unjust or fraudulent acts. In such circumstances, the auditor may take immediate action and resign.
I suspect in the above this isn’t the case – the auditor likely wanted to company to show things a specific way, and the audit committee likely disagreed. No choice her but to resign or fight.
– A resignation is serious. Stockholders should become very concerned if their auditor resigns. It is always a bad sign.
FYI – if the auditor uncovered criminal acts, or issues that would require them to report to relevant authorities (ie the SEC) they would have an obligation to disclose regardless and things would come out.
Given though that this isn’t one of the big “4”, it could also be that Youngevity is become to difficult to handle, slow to pay, or just a pain in the ass to work with.
The statement “no adverse opinion… except for… expressing substantial doubt about the ability of the Company to continue as a going concern” sounds a bit like saying the doctor gave you a clean bill of health, apart from the diagnosis of terminal cancer.
If the auditor says there is substantial doubt over whether the company can continue as a going concern, that means you’re going bust. Not gone, but going.
I’m not sure there’s much to add to the filing. Youngevity has been overstating its revenues. Having been called out on it, they’ve filed amended reports correcting the errors, but have failed to correct the problem to the extent that the auditors can be confident they won’t do it again.
An auditor cannot do its job if the company isn’t being straight with it.
Bear in mind that this is an MLM company so it lives and breathes on not fully disclosing its finances – i.e. not disclosing, in a way that is clear and not misleading, that 90% of the punters who sign up will lose money and get nowhere near the financial independence Youngevity claims it will hand them on a plate.
You’re just not supposed to treat your auditors like your marks.
I’ve seen that statement countless times over the years. Seems to be in every MLM company’s SEC filings.
I’m also not an accountant, but from what I’ve seen, auditors tend to understate in both directions. If they find nothing wrong, they’ll give a squeaky-clean company the same report as a sloppy one: a luke-warm “the books seem to be in accordance with standard accounting practices,” or words to that effect.
In the other direction, “We have doubts” could mean anything from a bump in the road to a huge iceberg in the path of the Titanic.
I think the strongest message is in their resignation; that speaks volumes. Oh, to be a fly on the wall at the meeting that made that decision, but I imagine the conversation went along the lines of: “If we don’t want Youngevity dragging us down like Enron took down Arthur Anderson, we’d best cut our exposure NOW, while we still can.” (That’s just conjecture on my part, of course, but in my opinion a similar conversation was going on behind the scenes.)
By the way, Oz, I think your reference to green tea in the article was supposed to say green coffee, unless I missed something (which I often do.)
Nah it was green coffee, thanks. Bubble tea gone wrong flashbacks.
For reference – auditors will state a company is a going concern if there are regular losses on the books and no clear plan for recovery.
The company may still have sufficient cash flows to keep operating, but the auditors duty to indicate that is pretty simple… if there’s regular losses on the books that might put it at risk, it’s a going concern.
Reality – auditors resign for many reasons. What you need to watch for on this one is who accepts the subsequent appointment as successor auditor (which they will need). Is it a bigger or smaller firm?
Typically if it’s a bigger firm, that would tell you that the old firm felt the company was too risky or big for their risk profile to audit…. where a “big 4” would take on a company like this in a heart beat if the fees were reasonable, and they saw no signs of fraud.
Successor firms will follow the rules of engagement and contact the previous audit firm and ask for any material reasons why they should NOT take the engagement – at which point the old auditors will open the door to the new firm with any of the same issues.
So watch and see who takes over….