The 10-K Annual Report for everyone’s favourite 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 Real tree® V2
Johnson & Johnson’s 10-k report for contingent liabilities. Johnson & Johnson has multiple pending
lawsuits or other types of contingent liabilities. The company makes note of these in their annual
report in the Risk Factors section (Item 1A) as well as in the notes to the financials (Note 19 Legal
Proceedings). Johnson and Johnson note that they do record accruals for contingencies of legal
matters when the liability is probable to be incurred and the amount can be reasonably estimated.
Of the many lawsuits, the opioid litigation was the most notable to me. These lawsuits were
brought forth from multiple government agencies. These began around 2014 and it looks like for
the most part J&J have settled with each of the jurisdictions that brought the litigation.
Some procedures that can be undertaken to determine contingent liabilities in an audit are to
review the minutes of board of directors or shareholders meetings. It is highly likely upcoming
lawsuits would be discussed here. The auditor can also review loan agreements, leases,
correspondence from governmental agencies, and any contracts currently in place. IRS reports or
tax returns can also help identify contingent liabilities. Inquiring about the company’s policy for
handling contingent liabilities would also assist with this effort as well. This week’s discussion
relates to contingencies. d Contingencies can be classified as loss or gain contingencies. d Loss
contingencies should be recognized immediately in the financial statements if the loss is probable
and it can be reasonably estimated. If the loss is probable, but the amount cannot be reasonably
estimated, then the loss must be disclosed in the notes accompanying the financial statements. d
Gain contingencies are recognized when realized. d In other words, gain contingencies are
recognized in the financial statements when the funds are received. d Early recognition of
loss/expense and delayed recognition of gains are based on the principle of conservatism to
ensure that the financial statements are not misleading. d An example of a loss contingency would
be pending litigation that the organization has known responsibility for its role such as product
liability lawsuit. d An example of a gain contingency would be the actual check received from
defendants for successfully defending against patent infringement.
References:
Johnson & Johnson. (2022) Form 10-K 2022. U.S. Securities and Exchange Commission.
https://www.sec.gov/ix?doc=/Archives/edgar/data/200406/000020040622000022/jnj-
20220102.htm#i01be8f8f216a4c39adb513a606bfe937_55
Messier, W. Glover, S. Prawitt, D. (2019). Auditing & Assurance Services: A Systematic Approach
11th Edition. McGraw Hill Education.
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/1334036/000133403622000011/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.
