Harvard Case - Under Armour Settles with the SEC
"Under Armour Settles with the SEC" Harvard business case study is written by Mitchell Stein, Vaughan S. Radcliffe, David Booth. It deals with the challenges in the field of Accounting. The case study is 15 page(s) long and it was first published on : Feb 22, 2022
At Fern Fort University, we recommend that Under Armour implement a comprehensive program to enhance its internal controls, financial reporting processes, and corporate governance practices. This program should focus on strengthening accounting procedures and policies, improving financial statement accuracy, and fostering a culture of ethical behavior within the organization. By taking these steps, Under Armour can regain investor confidence, mitigate future risks, and achieve sustainable growth.
2. Background
This case study examines the accounting irregularities and subsequent SEC investigation that plagued Under Armour, a leading athletic apparel company. The investigation revealed that Under Armour had engaged in improper revenue recognition practices, leading to inflated financial statements and misleading investors. This misconduct resulted in a $15 million settlement with the SEC, tarnishing the company's reputation and raising concerns about its corporate governance.
The main protagonists in this case are Under Armour, its management team, and the SEC. The case highlights the importance of strong internal controls, accurate financial reporting, and ethical decision-making in ensuring the long-term success of a company.
3. Analysis of the Case Study
This case study can be analyzed through the lens of various frameworks, including:
- Corporate Governance Framework: The case demonstrates the importance of a robust corporate governance structure, including independent boards, strong internal controls, and transparent financial reporting. Under Armour's lack of proper oversight and internal controls allowed for the accounting irregularities to occur.
- Financial Reporting Framework: The case highlights the critical role of accurate and timely financial reporting in maintaining investor confidence and ensuring market integrity. Under Armour's improper revenue recognition practices violated Generally Accepted Accounting Principles (GAAP) and misled investors.
- Risk Management Framework: The case underscores the need for a comprehensive risk management framework that identifies, assesses, and mitigates potential risks. Under Armour failed to adequately assess and manage the risks associated with its accounting practices.
- Ethical Framework: The case emphasizes the importance of ethical decision-making and a culture of integrity within an organization. Under Armour's actions, driven by a desire to meet financial targets, violated ethical principles and ultimately harmed its stakeholders.
4. Recommendations
To address the issues highlighted in the case, Under Armour should implement the following recommendations:
- Strengthen Internal Controls: Implement a comprehensive system of internal controls to prevent future accounting irregularities. This includes:
- Enhanced accounting procedures and policies: Develop clear and detailed accounting procedures and policies that comply with GAAP and ensure proper revenue recognition.
- Improved segregation of duties: Ensure that different individuals are responsible for different aspects of the accounting process to prevent fraud and errors.
- Independent audits: Conduct regular and independent audits of the company's financial statements to ensure accuracy and compliance.
- Improve Financial Reporting Processes: Enhance financial reporting processes to ensure transparency, accuracy, and timeliness. This includes:
- Increased transparency: Provide investors with clear and concise information about the company's financial performance and risks.
- Enhanced financial statement analysis: Conduct rigorous financial statement analysis to identify potential issues and ensure accuracy.
- Improved communication with investors: Engage in open and transparent communication with investors to address their concerns and build trust.
- Foster a Culture of Ethical Behavior: Create a culture of ethical behavior within the organization by:
- Establishing a strong code of ethics: Implement a clear and comprehensive code of ethics that outlines expected behavior and values.
- Providing ethics training: Offer regular ethics training to all employees to reinforce ethical principles and address potential conflicts of interest.
- Creating a whistleblower program: Establish a confidential whistleblower program that encourages employees to report any suspected misconduct.
- Enhance Corporate Governance: Strengthen corporate governance practices to ensure accountability and transparency. This includes:
- Independent board of directors: Appoint a diverse and independent board of directors with the expertise to oversee the company's financial performance and governance.
- Strong audit committee: Establish a strong audit committee with independent members who oversee the company's financial reporting and internal controls.
- Enhanced disclosure requirements: Provide investors with more detailed information about the company's financial performance, risks, and governance practices.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core competencies and consistency with mission: The recommendations align with Under Armour's core competencies in athletic apparel and footwear, while also ensuring ethical and transparent business practices.
- External customers and internal clients: The recommendations aim to protect the interests of external customers and investors, while also fostering a positive and ethical work environment for internal clients.
- Competitors: The recommendations help Under Armour stay competitive by ensuring financial stability and a strong reputation, which are essential for attracting investors and customers.
- Attractiveness ' quantitative measures: The recommendations are expected to improve the company's financial performance by reducing costs associated with legal settlements, fines, and reputational damage.
- Assumptions: The recommendations assume that Under Armour is committed to ethical business practices and is willing to invest in the necessary resources to implement the recommended changes.
6. Conclusion
By implementing these recommendations, Under Armour can restore investor confidence, mitigate future risks, and achieve sustainable growth. The company must prioritize ethical behavior, transparency, and accountability to regain its reputation and build a strong foundation for the future.
7. Discussion
Other alternatives to the recommended approach include:
- Ignoring the issues: This approach could result in further legal and reputational damage, ultimately harming the company's long-term prospects.
- Minimal changes: This approach could fail to address the underlying issues and lead to future problems.
- External restructuring: This approach could be expensive and disruptive, and it may not address the root causes of the issues.
The recommended approach is the most comprehensive and sustainable solution, as it addresses the root causes of the issues and fosters a culture of ethical behavior within the organization.
8. Next Steps
To implement the recommendations, Under Armour should:
- Develop a detailed implementation plan: This plan should outline specific timelines, responsibilities, and resources for each recommendation.
- Establish a dedicated team: Create a dedicated team to oversee the implementation of the recommendations and monitor progress.
- Communicate with stakeholders: Regularly communicate with investors, employees, and other stakeholders about the progress made in implementing the recommendations.
By taking these steps, Under Armour can demonstrate its commitment to ethical business practices and regain the trust of its stakeholders.
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Case Description
In May 2021, a recent graduate from the master of business administration program at Ivey Business School noticed a news article about one of his investments, the leading athletic apparel company Under Armour, Inc. The article stated that Under Armour, Inc. was fined US$9 Million by the US Security and Exchange Commission. The charges were a result of concerns over the company's revenue reporting practices, but the company's share price dropped only very slightly following the announcement. The investor was considering his options regarding his investment. However, he was still curious and eager to learn more about the circumstances behind the US Security and Exchange Commission's charge and potential consequences for the company. The investor decided to examine Under Armour, Inc.'s revenue reporting practices, financial reporting practices, and corporate governance issues.
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