Dentsply probe finds former CFO violated ethics code

Dive Brief:

Dental supplies maker Dentsply Sirona announced Tuesday that an internal investigation had wrapped up that examined whether the use of incentives to sell products to certain distributors in North America were appropriately accounted for in the third and fourth quarters of 2021 as well as allegations that certain former senior managers directed the use of the incentives to achieve executive compensation targets.
While concluding there was no evidence of intentional wrongdoing or fraud, the Charlotte, N.C.-based company stated its audit and finance committee determined that some former senior managers, including its former CEO and CFO, violated provisions of the company’s code of ethics and business conduct, did not maintain and promote “an appropriate control environment,” and “created a culture where employees did not feel comfortable raising concerns without fear of retaliation,” according to a company SEC filing Tuesday.
The North America investigation “did not find evidence that the former Chief Executive Officer and former Chief Financial Officer specifically directed the Company’s use of incentives to achieve executive compensation targets in 2021,” the filing states. However, it “substantiated certain allegations regarding inappropriate tone at the top” by the former CEO and former CFO, according to the filing.

Dive Insight:

Earlier this year Dentsply disclosed publicly that its audit and finance committee initiated an internal investigation into whether incentives used to sell products to distributors were appropriately accounted for. Dentsply’s former CFO, Jorge Gomez. Gomez abruptly stepped down in May from his position as CFO at Cambridge, Mass.-based vaccine-maker Moderna after Dentsply’s internal investigation was made public.

Dentsply’s latest SEC filing did not identify by name the former C-suite executives cited. But a Dentsply spokesperson said in an emailed response to questions from CFO Dive that the former CEO and CFO referenced in the filing were Don Casey and Gomez. Gomez and Casey did not respond immediately to requests for comment.

Incentives and the company’s relationships with distributors were the focus of the investigation.

The investigation identified certain instances where the company’s distributors in North America were offered “incremental incentives,” including extended payment terms, to purchase products in order to aid the meeting of certain internal sales targets in the third and fourth quarters of 2021, according to the filing.

These incentives were offered in conjunction with net sales transactions amounting to approximately $38 million and $70 million in the third and fourth quarters of 2021, respectively, which in turn contributed to higher levels of distributor inventory at the end of the periods and lower sales to these distributors in the first and second quarters of 2022, the filing said.

Separately, the audit and finance committee expanded the investigation to examine higher returns of products from distributors in China during the fourth quarter of 2021 that were out of step with historical trends, the filing stated.

The probe concluded that members of the company’s local team in China failed to provide requested information to the company’s local accounting organization and lacked “truthfulness” in providing information to the company and the audit and finance committee.

The China investigation found actions by the company’s local commercial team in China as well as certain actions by the former CFO and the head of the company’s Asia-pacific commercial operations, violated the company’s code of ethics and business conduct, the filing states.

The company also announced Tuesday that it determined it would be “appropriate” to correct misstatements in previous financial statements by amending its third quarter 2021 10-Q as well as its 10-K for the fiscal year ending Dec. 31. 2021.

The company also said it expects to record a pre-tax non-cash charge related to impairment of its goodwill and intangible assets for the nine months ended Sept. 30, due primarily to “unfavorable macroeconomic factors” such as higher cost of capital, cost inflation, unfavorable foreign currency impacts and increased supply chain costs.

Eric Brandt, chairman of Dentsply Sirona’s board of directors, said in a statement contained in Tuesday’s release that the company’s audit and finance committee’s investigation process and conclusions have the board’s full support.

“The Company has already taken decisive and meaningful steps to address the findings and is now implementing enhancements and remedial measures to ensure these issues are thoroughly resolved,” he said in the company release. “With a management team that is committed to accountability, operational rigor and integrity, coupled with the remedial measures, the entire Dentsply Sirona organization can move forward focused on delivering long-term growth and value creation.”