The 10-K Annual Report for everyone’s favorite footwear brand,
Crocs, Inc. the vaunted creator of the Crocs Classic Clog in Celery
Green, the Crocs Classic Clog KFC, and of course the Crocs Mens
Classic Clog C Cereal.
One contingent liability listed in the 10-K filing related to an audit
conducted by the Brazilian Federal Tax Authorities on footwear Crocs
Inc. imported from China between 2010 and 2014. Crocs was issued
an assessment of approximately $2.6 million dollars (converted from
Brazilian Real) plus unstated interest and penalties for, presumably, a
violation of Brazilian tax or import laws. In the footnote provided
under the contingencies section, Crocs states that they disputed the
assessment made on January 13, 2015. In February of that same year,
Crocs was issued an addition assessment of approximately $6 million
(converted again) plus unstated interest and penalties. This
assessment was similarly disputed. In 2017, the appeal of the first
assessment was dismissed along with all fines, penalties, and interest
(however much those were). The second appeal was partially
successful, with reduced the principle, penalties, and interest by
about 38%. Following the decision on the second appeal, the Brazilian
Tax Authority appealed that decision, and this appeal has yet to be
decided. Crocs stated an estimate for potential cost of the
assessments at $4.5 million USD and noted that they did not record
this figure within its financial statements due to the inability to
predict the outcome or timing of the appeal, or the estimated
potential amount of loss.
In this case, possible procedures auditors might use to search for
contingent liabilities would be a combination of procedures. First,
reviewing the minutes of meetings of the board of directors of Crocs
Inc., committees of this board and stockholders for discussion related
to the status of the appeal and for any information of interest related
to the case, or whether the violation was indicative of deficiencies in
internal controls. Second would be a review of correspondence from
government agencies, particularly with the Brazilian Tax Authorities,
along with a review of tax records related to the taxes filed in Brazil.
I attempted to get additional information online on what the violation
was that spurred the ire of the Brazilian Tax Authorities but was not
able to locate any article or resource. I guarantee however, it was not
related to the quality of the craftmanship of the Crocs Classic
Realtree® V2
References
Birdsall, L. (2020, September 18). The 18 best pairs of crocs you can
buy. Reviewed. Retrieved October 13, 2022, from
https://www.reviewed.com/style/features/18-best-pairs-crocs-you-
can-buy
Crocs Inc. SEC Filing 10-K for December 31, 2021. 10-K. Retrieved
from
https://www.sec.gov/Archives/edgar/data/1334036/00013340362
2000011/crox-20211231.htm
Messier, W. F., Jr., Glover, S. M., & Prawitt, D. F. (2017). Auditing &
assurance services: A systematic approach (10th ed.). New York, NY:
McGraw-Hill Education.
