Posts filed under 'Accounting Frauds'
Finally an SEC investigation that did not lead to any enoforcement action. After completing their investigation the SEC did not recommend any enforcement action for KB Homes.
The SEC had launched a probe last year into possible accounting and disclosure violations by the company. But apparetly did not find anything wrong. Well thats definitely good news for the homebuilder, considering the economy isnt providing any relief to them. Had to write about this as this is a ray of hope that not all accounting investigations end up exposing fraud!
September 2nd, 2010
What would you do with $30 million? Well Sujata Sachdeva, the VP of Finance and Principal Accounting Officer at Koss Corporation bought designer clothes, furs, purses, shoes, jewelry, household furnishings, cars, did home improvement and renovations. The only difference is it wasnt her money, it was funds that belonged to the company, Koss Corpration. She had support from the senior accountant, Julie Mulvanev, together they concealed the fraud by overstating assets, expenses, and cost of sales, and by understating liabilities and sales. Based on the fraudulent records prepared by Sachdeva and Mulvaney, Koss prepared materially false financial statements and filed materially false current, quarterly, and annual reports with the SEC.
On August 31, 2010, the Securities and Exchange Commission charged two former senior accounting professionals at Koss Corporation with accounting fraud, violation of book and record keeping and other related misconduct arising from the embezzlement of more than $30 million from the company. According to the complaint, the scheme began in 2004 and lasted through December 2009. After discovering the embezzlement, Koss amended and restated its financial statements for fiscal years 2008 and 2009 and the first three quarters of fiscal year 2010. Both Sachdeva and Mulvaney have been terminated by the company.
Sachdeva embezzled funds from company accounts through different means, including cashier’s checks, unauthorized wire transfers, and unauthorized payments from petty cash. Sachdeva fraudulently authorized the issuance of more than 500 cashier’s checks totaling more than $15 million. She used them to make approximately $10 million in payments to American Express for her personal credit card, and also used them to make direct payments to luxury retailers. At times, Sachdeva used acronyms in an attempt to conceal the identities of the check recipients — such as “N.M. Inc.” for Neiman Marcus and “S.F.A. Inc.” for Saks Fifth Avenue. Well thats what I call creative accounting!
August 31st, 2010
On August 26,2010; a New Jersey appeals court found sufficient evidence that KPMG was negligent in its audits of the books of Papel Giftware Inc. KPMG audited the bookd of the ceramic company, the acquirer, Cast Art Industries LLC., and its financial backers relied on these audit reports to buy the conmpany. Had KPMG done a better job, the audit should have uncovered vast fraud and irregularities, and definitely would have made the aquirer think twice about making the purchase.
In preparation for its 2000 merger with Cast Art Industries LLC, Papel Giftware Inc. retained KPMG to audit its books for 1997 through 1999.After the merger, Cast Art’s officials discovered that Papel had overstated its revenues and sales. Two years after Cast Art bought Papel, it went under, largely because of the debt it incurred in purchasing the company that was worth little or nothing.
The question is whats the purpose of getting books audited if you cant rely on it to make business decisions. The company went under because they relied on KPMG’s audit report, isnt that what KPMG supposed to do?
August 30th, 2010
While reading the big accounting fraud at Satyam,a company based in India, which got a lot of media coverage not only in India but also in the US, I realized that globalization is also a good policing methodology. Most of the earlier cases of reported accounting frauds have been in the USA, UK , but now such cases in the upcoming economies are also coming to light thanks to globalization.
Any company that desires to join the globalization bandwagon needs to follow the rules and ensure that their financial statements reflects their true performance. If not then beware because the Gloablization Police is watching!
August 2nd, 2010
Another big company, same old story. To meet the street’s expectation, the company tried to cook its books.
The allegation by SEC is that Dell met or beat the analysts’ earnings expectations by using a cookie jar reserve, from 2002 to 2006. Dell received from Intel, the computer chip maker payments not to use chips from Intel’s rival Advanced Micro Devices. It gets even more interesting, these payments accounted for 76% of Dell’s operating income in early 2007.
So this is what Dell did. They put the payments that they got from Intel in reserves. Every time their financial results were below expectations they would use somepart of the reserves to bridge the gap. And this is how they kept looking good to the analysts, the street and the shareholders.
Well they paid the price. The company did not accept or deny the charges, they have agreed to pay $100M to settle charges. Their CEO Michel Dell agreed to pay $4M. A few more executives also agreed to pay fines.
Another accounting fraud, settled by fines!
July 25th, 2010
Lehman failed, but so did their auditors, Ernst and Young to report deliberate balance sheet manipulations that the company used to show better metrics to the outside world.
Leverage and liquidity ratios are the two key metrics that counterparties and credit rating agencies look at while evaluating investment banks. When Bears Sterns’ failed in March 2008, confidence in the industry as well as Lehman began to decline. At that time the executives felt the need to manipulate the financial statements in order to stop the declining confidence.
In the 2nd quarter of 2008, they started to manipulate their balance sheet by using accounting tricks, referred in Lehman world as Repo-105. The Normal repo transactions consisted of selling assets with the obligation of repurchase within a few days. These are considered a financing activity; and these sold assets stay on the bank’s balance sheet. Repo 105 made use of an accounting rule where, if the assets sold were valued at more than 105% of cash received, the transaction could be called a true sale and the assets removed from Lehman’s books. $50 billion of assets were removed from the balance sheet in this way, improving their leverage ratio from 13.9 to 12.1 at the time.
Throughout 2008 Lehman made false claims of having billions of dollars in available cash to repay counterparties, showing a far better liquidity picture than what was true, significant portions of the reported amounts were encumbered or otherwise unavailable for use. September 12, 2008, 2 days after reporting $41 billion in liquidity, true available funds totaled only $2 billion. And 3 days later, on September 15, 2008 Lehman filed for bankruptcy. An end to another behemoth.
November 2nd, 2009
In April 2002, the Adelphia scandal went public. The main component of the scandal were, Adelphia from at least 1998 through March 2002, fraudulently excluded from the Company’s annual and quarterly consolidated financial statements over $2.3 billion in its bank debt by systematically recording those liabilities on the books of unconsolidated affiliates. Secondly, the company regularly misstated in press releases, including earnings reports, and SEC filings. Thirdly, since at least 1998, Adelphia used fraudulent misrepresentations and omissions of material fact to conceal rampant self-dealing by the Rigas Family. For example, some members of the Rigas family forced the public company to pay for vacation properties and New York City apartments used personally by the Rigas Family, develop a golf course on land mostly owned by the Rigas Family, and issue over $772 million of Adelphia shares of common stock and over $563 million of Adelphia notes for the benefit of the Rigas Family. Soon after the announcement the company had been mired in Chapter 11 bankruptcy. The final verdict on the company was that the Rigas family had to forfeit $1.5billion, the company will pay $715 million to create a fund to compensate victims of the fraud.
March 2nd, 2009
On March 19, 2003, SEC filed an accounting fraud charge against HealthSouth and its CEO for inflating their revenue by $1.4B since 1999. To meet the Wall Street expectations, the allegation mentions, at the insistence of the CEO, Health South systematically overstated earnings , false increases in earnings were matched by false increases in the assets. The company’s methodology is quite interesting- every quarter the senior officer’s of the company met with the CEO with the actual results and they compared that to the street’s expectation. If earnings were lower than the expectations, the senior accounting personnel convened and decided on the entries that will help inflate revenues- mostly being reduction of contra revenue account , called contractual adjustment, and or decreasing expenses, and correspondingly increasing assets or decreasing liabilities. Quite an organized scheme.
February 21st, 2009
In August 2007, the CFO of Dell Computers acknowledged that there were some accounting irregularities found as a result of a lengthy internal investigation. The irregularities were mostly related to adjustments to various reserve and accrued liability accounts in the year 2003-2006, mostly to meet Wall Street’s expectation. The outcome was firing of some of the executives involved in the irregularities and restating their earnings round $150M for 2003- Q1 2007. Their auditor’s were PWC.
February 16th, 2009
Chairman of Satyam Computers, Ramalinga Raju resigned on the 7th of January, 2009 after notifying the board that he had falsified the company’s accounts. The company’s Balance Sheet as of September 30, 2008, carried inflated figures for cash and bank balances of INR 50.4B as against INR 53.6B reflected in books, it carried accrued interest of INR 376M which actually did not exist, an understated liability of INR 1.23B on account of funds arranged by the Chairman and overstated debtors position of INR 490M as against INR 2.65B in the books. The company’s auditors were Price Waterhouse, the Indian division of PWC.
February 16th, 2009
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