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Board and Fraud is a blog that aims to bring a practical approach to issues facing the board of directors and the audit committee specifically in the area of governance, risk management, compliance, and internal audit, with a strong focus on fraud, ethics, and internal controls.

Board and Fraud: SEC and Goodwill Impairment


The Securities and Exchange Commission (“SEC”) today charged New York-based brand-management company Sequential Brands Group, Inc. (“Sequential or “SQBG”) with failing to impair its goodwill as required by accounting principles and the federal securities laws.

The company allegedly carried the deception forward for three more quarters until it finally impaired all of its goodwill — totaling $304 million — in the fourth quarter of 2017.

Sequential licenses its brands for a range of product categories, including apparel, footwear, fashion accessories, and home goods. Its brands include Jessica Simpson, AND1, Avia, Joe’s, GAIAM, Ellen Tracy, William Rast, Heelys, Caribbean Joe, DVS, The Franklin Mint, Linens N Things, SPRI, and Nevados. 

If Sequential had timely recorded the impairment to goodwill for the fourth quarter of 2016, then Sequential’s reported net loss for 2016 would have been 54 times larger.

The SEC’s complaint alleges that Sequential failed to properly assess its goodwill for potential impairment after several months of declining stock prices followed by a precipitous drop in early November 2016.

Public companies, like Sequential, are required to test goodwill for potential impairment at least once a year—and on an interim basis when certain indicators, or “triggering events,” are present—and record any impairments. Sequential unreasonably failed to do so.

According to the complaint, Sequential conducted two internal calculations as of mid-December 2016 and year-end 2016, showing that its goodwill was likely impaired. These internal calculations used the same methodology that Sequential had disclosed in its SEC filings and had used in connection with its annual goodwill impairment testing just weeks before. Sequential ignored this clear, objective, quantitative evidence of likely impairment.

Furthermore, The complaint alleges that the company ignored this objective evidence of impairment. Instead, the complaint alleges, Sequential performed a strained, biased, and outcome-driven qualitative analysis that omitted any mention of its internal calculations, as well as numerous other negative developments in the company’s business, leading it to unreasonably conclude that goodwill was not impaired. As alleged, by avoiding an impairment to its goodwill in 2016, Sequential inflated its income from operations, created a false impression of its financial condition, and misstated its financial statements and reports for almost a year. Also, Sequential did not have adequate internal accounting controls or other systems to ensure that appropriate goodwill impairment assessments were conducted during interim periods between annual tests in accordance with governing accounting standards.

Sequential allegedly continued to improperly account for goodwill in the next three quarters before belatedly impairing all of its goodwill-totaling $304 million in the fourth quarter of 2017.


Goodwill is tested for impairment at the reporting unit level in accordance with ASC 280.

Management is required to assess goodwill for impairment annually and when a triggering event occurs.

For many companies, the impacts of COVID-19 could trigger the need for an interim goodwill impairment test. While not an exhaustive list, ASC 350-20 Goodwill states that the following may indicate that a triggering event has occurred and therefore, an interim impairment test may be needed:

    • Macroeconomic conditions, such as a deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates, or other equity and credit markets’ developments.
    • Industry and market considerations, such as a deterioration in the environment in which an entity operates, an increased competitive environment, a decline in market-dependent multiples or metrics (consider in both absolute terms and relative to peers), a change in the market for an entity’s products or services, or a regulatory or political development.
    • Cost factors such as increases in raw materials, labor, or other costs that have a negative effect on earnings and cash flows.
    • Overall financial performance, such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods.
    • Other relevant entity-specific events include changes in management, key personnel, strategy, or customers; contemplation of bankruptcy; or litigation.
    • Events affecting a reporting unit such as a change in the composition or carrying amount of its net assets, a more-likely-than-not expectation of selling or disposing of all, or a portion, of a reporting unit, the testing for recoverability of a significant asset group within a reporting unit, or recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit.
    • If applicable, a sustained decrease in share price (consider in both absolute terms and relative to peers).
    • Other

If based on the triggering event analysis, it is determined that it is more likely than not (a likelihood of more than 50 percent) that the fair value of a reporting unit is less than it’s carrying value, management will need to perform a quantitative or “step 1” goodwill impairment test. In order to perform the quantitative goodwill impairment test, the carrying value and fair value are calculated for each reporting unit. If a reporting unit’s carrying value exceeds the fair value, a goodwill impairment charge is recognized equal to the difference between the fair value and carrying value.

Triggering Event Considerations

COVID-19 has resulted in a declining economy hitting virtually every industry. For some companies, this may indicate that it is more likely than not that the reporting unit’s carrying value exceeds the fair value. In evaluating the company’s assessment, auditors may have to perform additional or different procedures than they have in the past. When performing this interim analysis, auditors may consider the following:

      • Do the circumstances as outlined in ASC 350-20-35-3C indicate that it may be more likely than not that a reporting unit’s carrying value exceeds its fair value?
      • If no, has management appropriately documented any negative factors that may impact the reporting unit’s fair value, and does the documentation support their conclusion?
      • If management determines an interim impairment test is not needed, is there contradictory evidence such as declining analyst projections, sustained decrease in stock price, or reported earnings below forecasted amounts that may suggest otherwise?


The complaint, filed in federal district court in Manhattan, charges Sequential with violating the antifraud provisions of Section 17(a)(3) of the Securities Act of 1933, and, additionally, charges Sequential with violations of the reporting, books and records, and internal controls provisions of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder.

The SEC is seeking a final judgment ordering injunctive relief and civil monetary penalties. The SEC’s investigation continues.

Board Oversight and Awareness

Given the nature of goodwill as an accounting estimate, I am not surprised by this action.

This Civil Action should be a strong reminder that anything involving judgment and estimates should be carefully scrutinized. Also, The COVID-19 pandemic and the related economic and market conditions should be considered as they could present new risks and uncertainties.

Any change in methodology or approach should be questioned!

When the board is unsure or uncomfortable, I suggest seeking professional guidance and documenting the process, including the conclusions reached.

Have a safe and happy holiday.


Jonathan T. Marks, CPA, CFF, CFE

This writing should not be relied upon as being definitive or all-inclusive, or a substitute for PCAOB and SEC rules, FASB accounting requirements, standards, guidance, or other resources.



SEC -Civil Action No. 20-CV-10471

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