Dive Brief:

• Baxter has estimated it overstated income from continuing operations by as much as $117 million a year between 2016 and 2019, after an internal probe found the maker of blood and kidney related products used a foreign exchange measurement "solely for the purpose of generating non-operating foreign exchange gains or avoiding foreign exchange losses​."

• The disclosure Thursday comes after the medtech flagged the issue last October. In a regulatory filing, Baxter disclosed preliminary results from the investigation into its use of an approach inconsistent with generally accepted accounting rules, or GAAP.

• The method caused Baxter to overstate its income in 2016, 2017, 2018 and the first half of 2019. Baxter is yet to report complete results for the third and fourth quarters of 2019.

Dive Insight:

Baxter alerted investors to a potential problem with its accounting practices in October. At the time, Baxter revealed it had begun an internal probe into its execution of intra-company transactions after it knew the related exchange rates. Baxter’s initial review showed the problem dated back to 2014.

Now, the investigation is “substantially complete,” according to Baxter. The probe found Baxter made the aforementioned transactions with knowledge of the exchange rates “solely for the purpose of generating non-operating foreign exchange gains or avoiding foreign exchange losses.”

Use of the flawed method may date back more than 10 years, the company said.

Baxter published preliminary estimates of the financial impact of the accounting practice. The biggest effect was seen in 2017, when Baxter estimates the misstatement of foreign exchange gains and losses added $113 million, or 10%, to its income from continuing operations before income tax. 

Deerfield, Illinois-based Baxter also estimates foreign exchange misstatements added $42 million and $60 million to its income in 2016 and 2018, respectively. The problem continued into the first half of last year. Baxter estimates foreign exchange misstatements added $36 million to its income over that period.

In reviewing its finances, Baxter identified “other immaterial misstatements” related to equipment leases, the translation of foreign financial positions into U.S. dollars and other matters. Those other misstatements had the biggest effect in 2018, when they added $17 million to Baxter’s income.

All told, Baxter reported it overstated its income by $278 million over a 42-month period. Further overstatement was partly offset by the discovery that Baxter understated some aspects of its income in 2016 to the tune of $2 million. 

Having completed the investigation, Baxter plans to file restated financial information and its annual report no later than the end of March. Baxter wants to make the information available “as soon as reasonably practicable.” The annual report will disclose “one or more material weaknesses,” including the foreign exchange problem, and details of Baxter’s remediation effort.

That may not mark the end of the fallout, though. Baxter previously informed the SEC of its internal investigation. In its latest statement, Baxter said it “is continuing to cooperate with the staff of the SEC.” Law firms are also working on class action lawsuits against Baxter.