Forterra, Inc. (FRTA) Directors Fail to Maintain Effective Internal Control
In March 2017, Forterra's directors issued a press release touting that Forterra's fourth quarter and fiscal year 2016 net sales had increased significantly. These results were reaffirmed in the Company's Form 10-K. However, Forterra's directors also recognized that its "disclosure controls and procedures were not effective…as of December 31, 2016," but assured investors the issues were limited to inventory, bill, and hold arrangements. These assurances materially understated the scope of Forterra's defects in internal and reporting controls. In reality many of Forterra's vendors threatened to discontinue service due to unpaid invoices, and issues in accounting caused its manufacturing facilities to have inventory discrepancies and operational delays. Consequently, Forterra's directors had inaccurately calculated and overstated its earnings in its fourth quarter and fiscal year 2016 reports, masking declines in organic sales for the fiscal year. Then, on May 15, 2017, Forterra disclosed in its 10-Q that the Company failed to achieve organic growth and that it had "identified and corrected prior period errors" amounting to an increase of $4.6 million in losses. On this news, Forterra's stock fell more than 24% to close at $14.93 per share and has since declined. Forterra has been named a defendant in a securities class action for violations of the Securities Exchange Act of 1933 and 1934 and in a whistleblower retaliation lawsuit brought by a former senior executive accusing it of intentionally falsifying its financial reports. Both cases pose further potential harm to investors.
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