The bug in the accounting at Computer Sciences

Nov 10, 2010

In their 10Q filing, Computer Sciences Corp. disclosed that it had found some accounting irregularities in their Nordic business unit. The issue amounts to a “material weakness” in internal controls over financial reporting. The company took a hit of $30 million to their Income Statement in their fiscal quarter two ended October 2. There is more to come, there will be another $40 million charged during the first half of FY2011. These charges were related to prior period but due to deficiencies in the internal control system were not discovered up until now.

The company said the charges reflect “accounting errors and the misapplication of internal accounting policies and U.S. GAAP, as well as from accounting irregularities in the Nordic region, principally affecting prepaid accounts and outsourcing contract costs.”

Computer Systems is developing a remediation plan, including replacement of certain managers, strengthening controllership responsibilities, improved monitoring controls and oversight, and increased discipline associated with account reconciliations. Hopefully the issues are only in their Nordic business unit and hopefully this one time charge will clear all such issues and there are no more waiting to be uncovered.

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Accounting error that travelled through years!

Oct 22, 2010

Tui Travel a tour operator, a company formed in 2007 from the merger of German group Tui AG’s travel division and First Choice, disclosed that the company had overlooked £117 million of small cash discounts given to British holidaymakers. The finance director of the organization is stepping down due to the disclosure of the accounting issues.

These discounts comprised of reductions offered by Thomson travel agents, such as waiving of booking charge fees and discounts for e-tickets, as well as some cancellations, were not picked up when UK cash sales data was transmitted from high street shops to Tui Travel’s accounts department. In August the company announced that it had found £29 million , which was called  “small receivable balance” that was built up over a few years, and the management believed that these are unrecoverable. But low and behold, in October they announced that the small receivable balance of £29 million was not the only unrecoverable balance, they had found another £88m of unrecoverable balance. And this time it was not called a “small receivable balance”. The company will be restating their financials, taking a hit of £42m wiping out almost 10% of its operating profits for the year to 30 September 2009.  The impact on the year to 30 September 2010 has been limited to £5m.

The company clarified that the error was due to a “chaotic reporting process” , and not shortcomings among suppliers. Well that definitely builds confidence in the investor community about the company and its accounting. One might wonder if there are any more surprises creeping up from the chaotic reporting process! Lets wait and watch!

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Whistleblower auditor being harrased!

Oct 13, 2010

After auditing the books of Reliance Communications ( for those not aware of Reliance, it is the GE of India; a big company diversified into a lot of industries) a Indian government appointed accounting firm , Parakh & Co got a shocking response. The company has sought protection from the Indian Government against a criminal case filed by the Communications Industry Giant.

The firm stated that they received a notice from the police to surrender the audit paperwork related to their audit of Reliance.

Reliance’s story is that they had written in 2009 to the Telecoms Ministry and the Institute of Chartered Accountants of India regarding the auditor’s report. They had asked the communications ministry to reject the special audit on it by Parakh & Co and alleged that the report ‘was issued for malafide purpose, based on uncorroborated facts and done without any discussions with it (RCOM)’. The telco also stated that ‘the entire report was drafted for the purpose on sensationalising irrelevant matters’.

Whether the allegation of the auditor is true or not one cannot ignore the findings of the audit report. The audit report found that Reliance Communications had under reported revenue for two years, causing huge losses to the government in terms of license and spectrum fees and also corporate taxes. Based on the finding the government might fine the behemoth for evading those fees.

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Settlement with Delphi Corp’s former treasurer

Oct 8, 2010

The complaint against John Blahnik, the former treasurer and vice president of treasury, mergers and acquisitions at  Delphi Corp. was that he had participated in 3 fraudulent schemes, filing materially false and misleading financial statements on the company’s Forms 10-K for 2000 and 2003, and Forms 8-K for 2001 and 2003-2005.

The SEC alleged that Blahnik participated in fraudulent schemes at Delphi that led to filing materially false and misleading financial statements on the company’s filings for 2000 and 2003.  The complaint stated that Delphi improperly accounted for two round trip transactions as sales rather than as financing transactions leading to materially overstating their net income for Q4 2000, with the ripple effect of overstating their EPS and cash flows from operations, some of the key numbers that investors rely on to judge the strength of a company. Thats not the end of it, from 2003 to 2004, Delphi intentionally failed to disclose material sales of accounts receivable, or factoring.

To settle the case, Blahnik agreed to pay $100,000 to settle accounting fraud charges with the Securities and Exchange Commission.He was also prohibited Blahnik from serving as an officer or director of a public company for five years. What bothers me is the amount of settlement, $100,000 doesnt sound like an amount to deter senior executives from getting involved with cooking the books!

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$2.5M for the Whistleblower

Oct 8, 2010

Metropolitan Life Insurance Co. (MetLife) has been ordered to pay a whistle-blowing former broker, Ronald Roganti about $2.5 million in damages. The ruling states that after the broker had raised concerns about shoddy business pracitices he was mistreated. 

Roganti’s claim states that in 1999 he started to become aware of unethical practices and reported them to various executives as well as regulatory agencies. But instead of an inquiry being set up into these practices, his compensation was reduced as well as he was threatened to be terminated.

The case definitely is a step in the right direction. And with the Dodd-Frank Act having passed, which provides even stronger support to whistle blower protections, I wouldnt be surprised to see more of such cases in the future.

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No more window dressing for banks

Oct 7, 2010

The recent financial meltdown driven primarily by the financial institutions has made the finance community and the standard setting authorities jittery. Lots of small banks and financial institutions were wiped out, but the one that raised a lot of eyebrows was the demise of the Lehman Brothers. The financial institution used the “Repo 105″ accounting trick to dress up their balance sheet and show a better leverage ratio. The company survived till the market crashed and then all these tricks slowly starting coming to light leading to eventually the organization closing its doors for ever.

On October 7, the International Accounting Standards Board (whose rules are used in 100 countries) said that there will be much more stringent disclosure requirements for banks that transfer financial assets. These disclosures will be helpful for investors to better understand off-balance sheet risks and will alert them of any window dressing transactions at the end of the reporting period.  The change will be effective from July 1, 2011 but companies can apply them earlier.

Does this mean that there will be no more cases like the death of Lehman Brothers in the future, well that in opinion wont happen, but definitely we are moving in the right direction.I

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KB Homes comes home happy

Sep 2, 2010

Finally an SEC investigation that did not lead to any enforcement 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 apparently did not find anything wrong. Well thats definitely good news for the homebuilder, considering the economy isn’t 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!

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How to live lavishly on company funds!

Aug 31, 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!

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KPMG Accounting Malpractice verdict

Aug 30, 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 books of the ceramic company, the acquirer, Cast Art Industries LLC., and its financial backers relied on these audit reports to buy the company. 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. Auditing the company’s financials, isn’t that what KPMG was supposed to do?

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Globalization and Accounting Fraud

Aug 2, 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!

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Dells dilemna

Jul 25, 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!

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Lehman Brothers – Repo 105

Nov 2, 2009

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.

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Adelphia Communications

Mar 2, 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.

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Health South

Feb 21, 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.

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Dell Computers

Feb 16, 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.

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