The new Chief Executive Officer at 3D Systems (DDD), a provider of 3D printing and manufacturing solutions, spent his first year on the job navigating a pandemic, uncovering material weaknesses in the company's internal controls, and adjusting its financial statements. In it’s 2020 10-K, 3D Systems disclosed that it had identified two material weaknesses in its internal control over financial reporting.

In some cases, 3D Systems lacked appropriate internal controls. In others, where internal controls did exist, they were not executed properly including:

1) For certain non-standard contracts and non-standard contract terms
2) Over the review of internally prepared reports and analyses utilized in the financial closing process

In the annual report, management blames turnover and suggests there’s little to worry about:

“These control deficiencies were partially related to employee turnover, resulting in a temporary shortage of personnel with appropriate knowledge or skills to perform an effective review during our financial statement close process. In addition, certain control deficiencies related to the completeness and review of transactions that were infrequent in nature.”

Though 3D Systems says the control deficiencies did not result in material misstatements of its annual or interim consolidated financial statements, they did result in immaterial out-of-period adjustments that were recorded in the quarter ended December 31, 2020. The company is hiring staff and implementing new procedures to strengthen its internal controls. However, investors expecting progress will have to wait as 3D Systems says the problems only recently discovered:

“The material weaknesses described above were identified after December 31, 2020. The Company is in the process of implementing certain changes in its internal controls to remediate the material weaknesses described above. The implementation of the material aspects of this remediation began in the first quarter of fiscal year 2021; therefore, there were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially effect, our internal control over financial reporting.”

Investors should be aware that 3D Systems’ auditor BDO— which didn’t flag 3D’s internal controls as problematic under the former CEO a year earlier— identified revenue recognition from 3D’s collaborations and licensing agreements as a critical audit matter in the latest annual report. BDO did not identify revenue recognition as a critical audit matter in the previous year’s annual report. In the 2020 10-K, BDO reports:

“We do not express an opinion or any other form of assurance on management’s statements referring to any corrective actions taken by the Company after the date of management’s assessment.”

Separately, In October 2017, 3D Systems received an administrative subpoena from the Bureau of Industry and Security of the Department of Commerce (BIS) requesting the production of records in connection with possible violations of U.S. export control laws. While collecting information in response to the subpoena, 3D’s internal investigation identified potential violations of the International Traffic in Arms Regulations (ITAR) administered by the Directorate of Defense Trade Controls of the Department of State (DDTC) and potential violations of the Export Administration Regulations administered by the BIS.

In 2018, while 3D says it was cooperating with the government, the company says it identified numerous potentially unauthorized exports of technical data. In 2019, as part of its ongoing review of trade compliance risks 3D notified the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) about potential violations of economic sanctions related to Iran.