CHS Inc. on Monday revised its profit downward over five years by $157.9 million after it came to light that a freight trader at the agricultural cooperative had misstated the value and quantity of contracts, making the company appear more profitable than it was.
The Inver Grove Heights-based farmer-owned co-op, a global grain, energy and food company, announced its 2018 fiscal year results on Monday and restated its finances for the first three quarters of the year and for the four years before that.
In fiscal 2018, after correcting for inflated rail freight values, CHS earned $776 million and posted revenue of $32.7 billion, a 2 percent increase.
The company will not pursue legal action against the employee who misstated the rail freight contracts, Chief Executive Jay Debertin said in an interview. But CHS has made several personnel changes since the fraud was uncovered two months ago, including the firing of the employee responsible and the resignation of the head of rail transportation and terminal operations.
CHS is working to improve the oversight that missed the inflated values recorded by the employee, who lied to auditors.
"We had a lack of controls that didn't discover that, and there's no excuse for that, and we own that and I own that. So we are about correcting those internal controls immediately," Debertin said. "When we looked across the company we had plenty of internal controls that worked really, really well. But this was clearly an area that did not, and I'm not going to look for some clever way of downplaying it and making it look better than it was. It is unacceptable."
Among its services that are tied to agriculture and energy, CHS contracts for space on large rail lines such as BNSF to move grain, oil and other commodities. It uses much of that rail capacity itself, but it also resells space on trains to other companies in what's called a secondary market.
The employee responsible for the accounting errors, according to the company, misstated the value and quantity of rail cars included in those contracts.
"I don't know why he did it," Debertin said, adding he would not speculate on motivations. The fired employee has not been identified.
"There have been other personnel changes. Some are visible, some are less visible," Debertin said.
The problem was discovered when employees noticed the potentially excessive valuations of the contracts and brought them to the attention of executives. The company hired Faegre Baker Daniels, a Minneapolis-based law firm, which then hired forensic accountants at Ernst & Young to investigate.
Initially when it announced the errors, CHS estimated its pretax income over the past five years could be overstated by anywhere from $100 million to $190 million. The ultimate adjustment — about $157.9 million — fell within that range.
The company's profits for its most recent fiscal year, which ended Aug. 31, were driven by strong performance at its fuel refineries in Montana and Kansas, and the sales of a pipeline in Council Bluffs, Iowa, and 34 gas stations in the area of Spokane, Wash.
CHS Inc.'s grain processing and food ingredient businesses had a strong year, but the company's overall ag business was hurt by trade uncertainty, Debertin said. Retaliatory tariffs have shut down the Chinese market for U.S. soybeans and hurt prices for U.S. pork and dairy products.
The outcome of a dinner meeting between President Donald Trump and Chinese President Xi Jinping on Saturday was widely interpreted as a sign of progress on trade negotiations. But for now, tariffs remain in place.
"Those that are the most sure they have this figured out, you kind of trust them the least," Debertin said. "The best thing we can do is focus hard on trying to operate in this environment and do really well at running our business, but it's a difficult time for people in agriculture."
Adam Belz • 612-673-4405 Twitter: @adambelz
