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
On February 10, 2009, SEC issued the final rule mandating that the 500 largest public companies start to file their financial results using XBRL. The effective date of the new rule is April 13, 2009, which means that most of the largest public issuers are required to file their quarterly results using XBRL for fiscal period ending on or after June 15. By 2010, all accelerated filers must comply with the new rule and by 2011 all public companies will have to file using XBRL.
February 16th, 2009
In May 2001, SEC files a complaint against 5 of Sunbeam Corporation’s former officers, alleging that senior management of Sunbeam engaged in fraudulent scheme to create an illusion of successful restructuring of the company and thus facilitating a sale of the company at an inflated price. Sunbeam created a cookie jar reserve of the amount of $35 Million at end of 1996, and used this to inflate the income in 2007. The company also used channel stuffing and improper recognition of revenue on contingent sales and indulging in improper buy and hold sales and incorrect accounting for supplier rebates. In 1997, at least $62 million of Sunbeam’s reported $189 million income came from accounting fraud.Starting with 1996, the company created improper reserves of $35 million at year end 1996. Sunbeam took a total restructuring charge of $337.6 million at year-end 1996. However, management padded this charge with at least $35 million in improper restructuring and other reserves and accruals, excessive write-downs, and prematurely recognized expenses that materially distorted the Company’s reported results of operations for fiscal year 1996, and would materially distort its reported results of operations in all quarters of fiscal year 1997, as these improper reserves were drawn into income.
The most substantial contribution to Sunbeam’s improper reserves came from $18.7 million in 1996 restructuring costs that management knew or was reckless in not knowing were not in conformity with Generally Accepted Accounting Principles (“GAAP”).
Sunbeam also created a $12 million litigation reserve against its potential liability for an environmental remediation. However, this reserve amount was not established in conformity with GAAP and improperly overstated Sunbeam’s probable liability in that matter by at least $6 million. Under Financial Accounting Standard No. 5 (“FAS 5″), a company must create a litigation loss reserve if (1) a loss is probable and (2) the amount of the expected loss is material and reasonably estimable. If a company determines that a loss is probable, it next must consider whether the amount of the loss will be material and if it can be estimated. If the loss is not material or cannot be reasonably estimated, no reserve is required. Even if it is impossible to estimate the exact amount of probable loss, however, a company should attempt to estimate the range of possible losses. If no amount within the range appears to be the best estimate, the company should reserve the low end of the range and then disclose the remaining amount, up to the high end of the range, as a “reasonably possible” loss. In 1997 the company settled for $3 million the claim to which the reserve related. At the conclusion of the fourth quarter of 1996, Sunbeam management knew or recklessly disregarded facts indicating that the $12 million reserve was at least $6 million in excess of Sunbeam’s probable liability on this claim. Thus Sunbeam’s fourth quarter 1997 results were knowingly or recklessly inflated by at least $6 million when that excess was released into income.
In connection with its restructuring, Sunbeam planned to eliminate half of its household product lines. Its inventory of eliminated products was to be sold to liquidators at a substantial discount. In adjusting the capitalized variances ( method used to assign cost basis to inventory) associated with its inventory of household products at year-end 1996, however, Company management knowingly or recklessly failed to distinguish excess and obsolete inventory from “good” inventory from continuing product lines. As a result, Sunbeam understated the balance sheet value of its good household inventory at year-end 1996 by $2.1 million. This caused Sunbeam’s 1996 loss to be overstated by $2.1 million, and improved Sunbeam’s profitability by the same amount when household products were sold at inflated margins during the first quarter of 1997.
Sunbeam had contracted to pay its advertising agency a total of approximately $2.7 million in fees and (potential) bonus to cover services rendered from late 1996 through the end of 1997. However, Sunbeam management knowingly or recklessly recognized this entire amount as a 1996 expense, including $2.3 million that related to services to be performed in 1997. This enabled Sunbeam to improperly improve its net income in all quarters of 1997($330K should have been recognized as expense in Q1 1997, $1.2 Million in Q2, $663K in Q3, as described below.) Under US GAAP, A company may pay for goods or services before they have been received. Any amounts that have been paid for goods and services not received by the end of an accounting period are shown in the balance sheet as prepayments. These amounts will not be shown as costs in the P & L. When the goods or services are received, then the amounts will be passed through the P & L and deducted from the prepayments section of the balance sheet.
Finally, in addition to buying national advertising to create demand for its products, Sunbeam funded a portion of its retailers’ costs of running local promotions. At year-end 1996, Sunbeam set its “cooperative advertising” reserve at $21.8 million without performing any test of the reasonableness of that amount. Therefore, this amount was neither probable nor arrived at by reasonable estimation, in contravention of FAS 5. This reserve was used in Q2 2007 to boost the net income by $5.8 million.
At the end of March 1997, just before the quarter closed, Sunbeam booked $1.5 million in revenue and $400,000 in income from a purported sale of barbecue grills to a wholesaler. The wholesaler held Sunbeam merchandise over a quarter end, without accepting any of the risks of ownership; the agreement provided that the wholesaler could return all of the merchandise if it did not sell it, and that Sunbeam would pay all costs of shipment (in both directions) and storage. Incurring no expenses in this transaction, the wholesaler in fact returned all of the grills to Sunbeam during the third quarter of 1997. GAAP does not permit the recognition of revenue on transactions lacking economic substance. These were contingent sales (see accounting rule for contingent sales under Xerox) and should not have been recognized in Q1.
In the second quarter of 1997, Sunbeam began using “bill and hold sales” to improve earnings. Specifically, the Company began offering its customers financial incentives to write purchase orders before they needed the goods. Thus, Sunbeam sold goods in the second quarter that it would normally have sold in later periods. Since many customers who wished to take advantage of these inducements could not burden their warehouses with out-of-season merchandise, Sunbeam offered to hold product for its customers until delivery was requested. Sunbeam typically also paid the costs of storage, shipment and insurance on the product. Moreover, the customers often retained the right, through explicit agreement or established practice, to return unsold product to Sunbeam.
Bill and hold sales are unusual transactions subject to stringent accounting criteria. The Commission has previously articulated these criteria in In the Matter of Stewart Parness, Exchange Act Rel. No. 23507, Accounting and Auditing Enforcement Rel. (“AAER”) No. 108 (August 5, 1986).The Parness criteria relevant to the instant case include: the buyer, not the seller, must request that the transaction be on a bill and hold basis; the buyer must have a substantial business purpose for ordering the goods on a bill and hold basis; and the risks of ownership must have passed to the buyer.
Sunbeam’s bill and hold transactions did not meet the above criteria. Sunbeam procured these sales by offering price, credit and other concessions to induce customers to write purchase orders before they would otherwise have done so. Thus, it would be inaccurate to claim that the buyer had requested “the transaction be on a bill and hold basis.” It is also not the case that the buyer has “a substantial business purpose for ordering the goods on a bill and hold basis,” when its only motive is to obtain the various inducements offered by the seller. Such an interpretation would substitute the seller’s business purpose (e.g., to accelerate recognition of sales revenue) for the buyer’s. Sunbeam paid the costs of insuring, storing and shipping the product, and in many instances was willing to accept the return of the product. Therefore, the customers did not accept the risks of ownership. In summation, these transactions were little more than projected orders disguised as sales.
Beginning during the second quarter of 1997, Sunbeam began recording as income rebates obtained from suppliers that properly related to later period purchases. As a result of aggressive negotiation by Sunbeam, four suppliers paid rebates in the second quarter in the total amount of $2.75 million. Under GAAP, a rebate should normally be recorded as a reduction in cost of sales in the period in which its associated sale is made. That the supplier rebates obtained by Sunbeam beginning in the second quarter of 1997 were made in contemplation of future purchases, and therefore should have been recognized on a pro rata basis as the related sales were made.
All the above (along with some more accounting inconsistencies) led the company to the path of bankruptcy. The CEO and some other senior executives were fined and removed from their place in the company. The CEO Dunlap had to accept a life time ban from ever serving again as an officer or director of a public company.
December 31st, 2007
In September 2004, SEC announced securities fraud charges against Computer Associates International Inc, and three of its former senior executives alleging that from 1998 to 2000, Computer Associates routinely kept its books open to record revenue from contracts executed after the quarter ended in order to meet Wall Street quarterly earnings estimates. In total, Computer Associates prematurely recognized $2.2 billion in revenue in FY2000 and FY2001 and more than $1.1 billion in premature revenue in prior quarters.
The issue was timing of recognition of revenue. The former CEO Sanjay Kumar and the former Vice President of Finance David Richards, along with others, allegedly took part in a systemic, company-wide practice of falsely and fraudulently recording and reporting within a fiscal quarter revenue associated with certain license agreements, even though those agreements had not in fact been finalized and signed during that quarter. In the week following the end of fiscal periods, while the books were held open, Kumar and Richards directed CA sales managers and salespeople to finalize and backdate license agreements. Revenue from those falsely dated license agreements was then improperly recognized in the quarter just ended. This practice, sometimes referred to within CA as the “35-day month” or the “three-day window,” violated generally accepted accounting principles and resulted in the filing of materially false financial statements. GAAP states that revenues should not be recorded till both parties have signed the contract, clearly backdating the contracts was in violation of this GAAP principle.
The goal of the 35-day month, was to permit CA to report that it met or exceeded its projected quarterly revenue and earnings when, in truth, it had not. Kumar and Richards allegedly met routinely and conferred with each other during the week following the end of fiscal periods to determine whether CA had generated sufficient revenue to meet the quarterly projections, and closed CA’s books only after they determined that CA had generated enough revenue to meet the quarterly projections.
Moreover, executives at Computer Associates were big shareholders themselves, and many held enormous blocks of stock options. They therefore had a big financial stake in the share price, and thus an incentive to inflate results.
A previous stock option set in 1995 specified that a certain number of shares would vest when CA’s shares sustained a target price. The benchmark was met in 1998, and the three executives combined received nearly $1 billion in Computer Associates stock. Since then, at least four other class-action suits have been filed against Computer Associates. Kumar was compensated handsomely: in 1998, he netted a $330 million bonus, one of the largest paydays of any American executive.
In the first, second, third and fourth quarters of FY2000, respectively, Computer Associates inflated its properly recorded revenue by approximately 25%, 53%, 46%, and 22% by improperly including prematurely recognized revenue. the goal was to meet or beat per-share earnings estimates of Wall Street analysts, a key to keeping a company’s stock price rising.
After Computer Associates substantially refrained from recognizing revenue prematurely from contracts that its customers had signed after quarter end during the first quarter of its fiscal year 2001, the company missed its earnings estimate and Computer Associates’ stock price dropped over 43% in a single day.
The most extreme incident was the second quarter of 2000, when the company reported $557 million in revenues beyond the $1.047 billion it could properly claim. The company thus reported 60 cents in earnings per share, beating the consensus Wall Street forecast of 59 cents. Without the padded revenue, earnings would have been a mere 5 cents per share and the stock price might well have fallen.
The company agreed to pay $225 million in restitution to shareholders to settle a civil case brought by the Securities and Exchange Commission and to defer criminal charges by the U.S. Department of Justice.
December 31st, 2007
In August 2004, SEC files an enforcement action against Bristol- Myers Squibb alleging that Bristol-Myers used earnings management schemes to distort the true performance of the company and harmed the company’s shareholders. During 2000 and 2001 the company engaged in fraudulent schemes to inflate its sales and earnings in order to create the false appearance that the company had met or exceeded its internal sales and earnings targets and Wall Street analysts’ earnings estimates. The company inflated it’s 2001 revenue by $1.5B by channel stuffing (mainly two of its wholesalers McKesson and Cardinal). The company had to reduce reduced net sales by more than $1.4 billion for 2001, $678 million for 2000, and $376 million for 1999. The company increased sales for the six months ended June 30, 2002 by $653 million. It also reduced net earnings from continuing operations by $376 million, $206 million and $331 million in the years ended 2001, 2000 and 1999, while net earnings from continuing operations were increased by $201 million in the six months ended June 30, 2002. The company also agreed to pay $100 million civil penalty and $50 million to be set aside for shareholder’s who were harmed by the fraud.
December 28th, 2007
In April 2002, SEC files a complaint against Xerox alleging that Xerox used accounting tricks to deceive public from 1997 to 2000. Over this period Xerox improperly classified over $6 billion in revenue, leading to an overstatement of earnings by nearly $2 billion.The issue was timing of recognition of revenue, mostly due to improper lease accounting, Xerox booked revenue when leases were entered into rather than recording periodic retal payments. It was a “zero sum game”, in the first few years the irregularity increased the revenue and in the later years the revenue was reduced due to the accounting manipulation. The SEC investigation noted that “compensation of Xerox senior management depended significantly on their ability to meet [earnings] targets.” Because of the accounting manipulations, top Xerox executives were able to cash in on stock options valued at an estimated $35 million.
Apart from restating the financial results for the year 1997 through 2000, Xerox Corporation agreed to pay a $10 million penalty. On June 5, 2003, six Xerox senior executives accused of securities fraud, including its former chief executive officer, Paul A. Allaire and G. Richard Thoman, and its former chief financial officer, Barry D. Romeril, agreed to pay $22 million in penalties, disgorgement, and interest.
December 28th, 2007
Ever wondered what happens when we type a website name ending in .cm instead of .com. Well this is what happens. The .cm country code is owned by Cameroon. Not many websites are registered in the country. But the similarilty of .cm with .com makes it a big business opportunity. Kevin Ham, the domain king who has built a $300 million empire on domain names, sent some of his people to Cameroon to discuss the possibility of moving the .cm traffic to his website. This is what happens. When an internet user types a website with .cm extension, it gets transferred to a server in Cameroon. If the website is not registered with them it gets transferred to the website “agoga.com”. Agoga’s servers query Yahoo to find ads related to the typed name, which are then displayed on a parked page. Whenever a user clicks on an ad, Yahoo pays Ham, who shares an undisclosed slice of the revenue with Cameroon.
July 9th, 2007
He is the richest man in India, with a net worth of $20 Billion. He is the chairman, managing director and the largest shareholder of Reliance Industries, India’s largest private sector company. He is Mukesh Ambani. Since splitting with younger brother Anil in 2005 and taking control of $20 billion (revenues) Reliance Industries, founded by his late father Dhirubhai Ambani, his fortune has soared by $11 billion. Reliance Petroleum, the oil refining subsidiary of Reliance, in which Chevron has 5% stake, listed on May 2006. Betting $5.5 billion on retail ventures including Reliance Fresh, a chain of food stores; 60 are now open. Megaplans include $10 billion investment to develop special economic zones. Recently got board approval to hike personal stake in Reliance Industries from 44% to 48%.
June 17th, 2007
He is the fifth richest man in the world with a net worth of $32 billion. His company accounts for 10% of world’s production of steel. He is Lakshmi Mittal, the steel titan, who began his career working in his father’s steel making business in India and today is the chief executive of Arcelor-Mittal, a UK based company with $80 billion in sales. Not content to dominate the steel industry, Mittal is branching out. Among his latest deals: spent $980 million for a 50% stake in Kazakh oil firm Caspian Investment Resources, a subsidiary of Russia’s Lukoil. And last but not the least he is the richest man in the UK!
June 17th, 2007
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