AIG CEO finally on trial after 11 years!

This week marked the start of the trial of AIG’s CEO Hank Greenberg for his involvement in the accounting scandal that happened in the 2000s at the company. The case has been pushed out for so long as Greenberg’s attorneys appealed a total of nine pre-trial motions, where each appeal meant months of waiting. And now finally the trial will begin.

The case against the legend of the insurance industry seems like more of a test/case study for the government. The case of the prosecution will be based on an old law called the Martin Act where the State prosecutors have to prove that fraud happened and do not have to prove intent of fraud. If they are successful, this would set precedence for future cases against Wall Street tycoons. So its not only Mr. Greenberg’s trial, it is a test run for all such future cases.

Accounting fraud at American Realty

lawsuit photoFormer finance head of American Realty Capital Partners, now known as Vereit, charged with committing accounting fraud. Brian Block, CFO of the real estate investment company used an inflated metric that didn’t comply with GAAP.

The metric in question is adjusted funds from operations or AFFO, which is used to reflect cash flow by excluding non cash transactions like depreciation and amortization and other one item items. According to the case, Block and former head of accounting Lisa McAlister (who has already pleaded guilty to one count of conspiracy to commit securities fraud and other offenses in June) were made aware before the release of 2014 Q2 earnings that the method used to calculate AFFO was erroneously inflated. But the two along with another employee, didn’t address the issue and also didn’t change the methodology for previous or future filings. The case alleges that this led to misleading the investors into believing that the company is on track to meet its full year guidance.

Moreover, even though Block had knowledge of a material error in American Realty’s SEC filings, he did not let the Audit Committee know or the outside auditors of the company. He also did not address the issue in the subsequent filings of the company.

Knowledge is definitely power, especially when it comes to knowledge of fraud!

Office manager who stole half a million dollar

An office manager at Juneau Boint & Joint Center was unable to explain why she used the corporate credit card for personal purchases over 7 years of employment and half a million dollars! What did she buy, fuel, utilities and phone payments  ($80,087.39); groceries and liquor ($76,672.44); and entertainment or travel ($36,832.71). Trips to Portland, Las Vegas, Los Angeles (to visit Disneyland and see Tim McGraw in concert), Hawaii and Seattle (where she saw P!nk in concert and watched a Seahawks game) were also charged to the card. She also paid for her animals vet fee, her restaurant bills and her shopping sprees using company funds.

Who is she: her name is Christina A. Leamer. She embezzled company funds a week from her start date in September 2007 till she left the company in October 2014. Leamer was incharge of not only taking care of the office and ordering supplies but also payroll. So apart from showering herself with gifts she also was paying herself unauthorized wages, calling it vacation leave payments! So the company paid for her trips and also her vacation!

The discovery of the fraud came when the new office manager Joseph Powers took over and found inconsistencies in the reports. The owners of the business then hired a forensic certified public accountant from the Ketchikan firm Milner, Howard, and Palmer to help them unravel the mystery.

US Army needs accounting defense

In a recently released report of the Inspector General of the Defense Department, improper adjustments of $6.5 trillion for 2015 was highlighted. The adjustments were done without any invoices or receipts and were done to balance the books. Considering that the Defense Department is probably one of the biggest public money spenders; this is definitely very concerning.

Congress on its part has set September 30, 2017 deadline for the complete audit of Department of Defense spendings, which considering the  magnitude of the adjustment will be a miracle if they are ready by then! Maybe they can fight their way through this….

Update: I just read that the errors of $6.5 trillion were partly associated with system glitches. There were around 16,000 files that got wiped off the computer system of the Defense Finance and Accounting Service (DFAS) because of a flaw in the computing software!!!

Something not organic about Hain’s revenue

The organic food maker Hain Celestial Group announced that their financials for 2015 and Q1 2016 will be delayed as the company was evaluating their accounting for revenue. Not just that they also stated that the company also is looking into their internal controls over financial reporting. So not only are their revenue issues- the issues stem from flaws in their system/procedures.

The issue at hand is the period in which the company recorded revenue from concessions given to distributors, currently the company recognizes revenue when the products are shipped to the distributors vs when the distributor sells to retailers. For revenue recognition, one of the conditions is that the product is delivered, and just shipping the product to the distributor doesn’t meet the delivery criterion.

Even though the company states that this doesn’t impact the revenue of the company, it definitely shifts revenue between periods, making some periods look more profitable than they actually were.

The bigger issue is that it was not incorrect application of the accounting policy, the company is questioning their internal controls over financial reporting, so there are some systems issues/ procedural issues which need to be addressed. Lets see what the final result of their review is.