Advanced Drainage Systems Inc. is a manufacturer of high performance thermoplastic corrugated HDPE pipe with 63 plants and 32 distribution centers worldwide. It is headquartered in Ohio and its stock is traded on the NYSE.
According to a March 29, 2016 10-K, in June 2015, certain members of Advanced Drainage System, Inc.'s (ADS) finance staff responded affirmatively to questions posed in an audit, which asked members of the finance staff (i) whether they or anyone known to them had ever been asked to record a journal entry or other adjustment without proper authorization or support, (ii) whether they or anyone known to them had ever been asked or coerced to record a journal entry or other adjustment with which they were uncomfortable, or (iii) were they aware of any inappropriate journal entry or other adjustment in the entity’s financial records. As a result of the responses, the Audit Committee engaged independent counsel and authorized such independent counsel to conduct an investigative review. The Audit Committee’s independent counsel engaged the assistance of a third-party forensic consulting firm to assist in the investigation.
While the investigation found no evidence of fraud, it determined that the concerns reflected in the responses to the audit questions were well founded and resulted in restatement of prior period financial statements. The Audit Committee’s investigation also identified deficiencies in ADS' process for reconciling certain intra-company transactions with its unconsolidated South American joint venture, Tuberías Tigre-ADS Limitada.
On August 12, 2015, the SEC’s Division of Enforcement informed ADS that it was conducting an informal inquiry with respect to the company. As part of this inquiry, the SEC requested the voluntary production of certain documents generally related to ADS' accounting practices.
On August 14, 2015, ADS' Audit Committee, after consultation with management, determined that the company’s consolidated historical financial statements should be restated.
In October 2015, members of the ADS management became aware of transactions involving ADS Mexicana, S.A. de C.V. (“ADS Mexicana”) that ADS Mexicana personnel initially brought to the attention of the company for further review to confirm whether these transactions were appropriately characterized. Management promptly undertook a review to determine whether such transactions were properly recorded and/or characterized and to ensure that such transactions and their financial impact was appropriately reflected in ADS' consolidated financial statements. After receiving a preliminary report from management on the breadth and scope of the issues, the Audit Committee in November of 2015 authorized independent counsel and its forensic consulting firm to conduct an independent investigation. At the conclusion of the investigation, ADS management concluded that certain lease and services arrangements lacked commercial and economic substance or proper supporting documentation as to the services performed, and therefore were not appropriately reflected in the Company’s consolidated financial statements and that certain of those transactions should be re-characterized by ADS Mexicana as dividends as opposed to expenses. ADS indicated that it would cause ADS Mexicana to amend its tax returns filed in Mexico for the open tax periods affected as soon as practicable in order to reflect the appropriate tax treatment for the transactions as re-characterized.
The scope of the investigation also included other ADS Mexicana matters that were identified during the course of the investigation to determine whether those matters involved any unlawful payments in violation of the FCPA. The Audit Committee’s advisors did not find such matters to have been mischaracterized, inappropriately recorded or otherwise contrary to applicable law, including the FCPA. It was, however, determined that such matters were a further indication of weaknesses in the ADS Mexicana control environment.
ADS received a subpoena from the SEC on December 3, 2015 pursuant to a formal order of investigation.
According to ADS, the company has cooperated with the SEC in connection with this investigation and the production of documents.
In its 10-K filed on May 30, 2018, the company disclosed that it had issued a formal settlement offer to the SEC, but as of the filing, no settlement had yet been reached.
The investigation appears to have been resolved by a non-FCPA enforcement action filed on July 10, 2018.
