Adelphia Communications

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.

2 comments March 2nd, 2009

Health South

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.

Add comment February 21st, 2009

Dell Computers

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.

Add comment February 16th, 2009

Bristol-Myers Squibb

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.

Add comment December 28th, 2007

Xerox

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.

Add comment December 28th, 2007