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On November 4, 2019, the Wall Street Journal (WSJ) published an article on Under Armour, Inc. [NYSE: UA; UAA], claiming that the Company had been subject to investigations by the U.S. Securities and Exchange Commission (SEC) and Department of Justice (DOJ) since at least July 2017, yet the Company has never publicly disclosed this information. The article was released the day before Under Armour was set to disclose third quarter earnings.
In a conference call with investors the day after publication, CFO David Bergman confirmed the allegations were true, but stated that Under Armour believes its accounting policies are appropriate and refused to comment further. According to the WSJ, the investigation is focused on accounting policies related to revenue, specifically whether Under Armour was shifting revenue between quarters to appear more profitable.
After the news broke of the DOJ and SEC investigations into Under Armour’s revenue accounting practices, the Company’s Class A shares fell nearly 19%, while Class C shares fell 18%.
That stock drop prompted shareholder litigation, alleging that Under Armour failed to disclose material adverse facts about the Company’s business, operations and prospects, including the failure to disclose that the Company had been under investigation by the aforementioned government agencies.
While it is not required to disclose an SEC investigation until it becomes material, or until the SEC recommends an enforcement action, doing so ahead of the news breaking through an alternate source can help retain investor confidence. For a company that has experienced recent governance issues and other public relations troubles, investor confidence is paramount to success, particularly in light of decreasing revenue growth.
The apparel brand has been struggling in recent years, overwhelmed by intense competition and difficulties adapting to an evolving consumer landscape. Under Armour first instituted a restructuring plan in 2017 after consecutive quarterly losses, cutting its workforce and refocusing its efforts to align its product development process with newly defined customers.
Due to these recent concerns, Audit Analytics is looking back at other notable events for Under Armour and possible challenges in the future.
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