The errors relate to writing off tax assets that were booked on transactions between subsidiaries starting in 2007. The corrections amount to more than $500 million over 4 years starting 2007.

Other than the accounting issue the company will definitely get hit with lower revenue in the next year due to the ongoing turmoil in the Middle East and North Africa.

Martin Kelly, Lehman’s global financial controller, stated that the transactions had “no substance”—their “only purpose or motive . . . was reduction in the balance sheet.”

Other Lehman executives described Repo 105 transactions as an “accounting gimmick” and a “lazy way of managing the balance sheet as opposed to legitimately meeting balance sheet targets at quarter-end.” Bart McDade, Lehman’s president and chief operating officer in 2008 (the year the company filed for bankruptcy), in an email called Repo 105 transactions “another drug we are on.”

This drug definitely was fatal for the organization which filed for bankruptcy in 2008!

The lawsuit accuses BDO of careless auditing practices of Grand Court, a company engaged in servicing, acquisition, development, and management of senior living communities. An interesting factoid is that prior to hiring BDO Grand Court had fired their auditor Deloitte & Touche because the auditing firm did not agree with Grand Court about accounting procedures and insisted on appraising the value of all of Grand Court’s multi-family homes, rather than just a sampling of properties. Allegedly BDO agreed to use the less costly method of sampling and so they were brought in to replace Deloitte.

The errors were mainly related to the use of “Fresh State Accounting”, a form of accounting used by companies that have exited bankruptcy. But unlike most other restatements, this one has a positive impact on the company’s financial statements. The revised results have led to an increase in net income of approximately $25 million for the nine months ended September 30, 2010. The company’s book value also has been increased by 10 cents to $44.2 due to the restatement.

The company said that “Serious accounting irregularities have been brought to the attention of the board as a result of which the company will be carrying out an immediate investigation to consider the financial implications.”  It further stated that it had “strong reason to believe” profits for 2010 would be “materially below market expectations”, about £22 million, after the irregularities were uncovered internally.

Shareholders suffered last year due to poor perfomance of the company and have taken a further 25% hit since the business reported weak first-half results in September. This news is sure to increase the suffering of the shareholders.

The news will definitely hurt the company stock once the trading begins after the holiday period ends.

The complaint states that the company overstated its revenues in 2007 by booking invalid sales and engaging in improper revenue recognition practices. Two key cases highlighted in the complaint are – false booking of sales of $2.6 million by NutraCea to Bi- Coastal Pharmaceutical Corp and improperly recording revenue on bill and hold transactions – $1.9 million sale of product to ITV Global, Inc. (“ITV”) in the fourth quarter of 2007.

As a result of these two transactions alone, NutraCea overstated its product sales revenue by 36.8% and misstated its operating loss by nearly 7% for fiscal year end 2007.

The saga began when Parmalat defaulted on a $185 million bond payment in mid-November 2003. This act made the auditors and banks look more closely at the company accounts. Some 38% of Parmalat’s assets were supposedly held in a $4.9 billion Bank of America account of a Cayman Island based subsidiary of Parmalat called Bonlat. But on Dec. 19, Bank of America reported that no such account existed! And so began the unfolding of the grand scam at Parmalat.

Auditors first inquired about the Cayman Islands account in December, 2002, and received a letter on Bank of America stationery in March, 2003, confirming the existence of the account. The letter was later found to be a well done forgery by someone in Parmalat’s Collecchio headquarters. Also under question was the 2003 buy back of $3.6 billion in outstanding bonds that Parmalat claims to have done, which from the records doesn’t seem to have actually taken place.

Then there was the issue of the company selling itself credit linked notes, in effect placing a bet on its own credit worthiness and in the process creating an asset on its books. A 1999 deal with Citi is a good example of such a transaction. The company did a deal with Citi where the bank made a $146 million “investment” in return for a chunk of the company’s net profit. By setting up the transaction as an investment and not a loan Parmalat made its borrowing costs appear smaller than they actually were and created an asset rather than liability.

The question is where did the billions go? Well the CEO Calisto Tanzi confessed to misappropriating close to a billion dollars and diverting the funds to cover losses in other family owned businesses. From one loss making entity to another loss maker; definitely not a good business move Mr Tanzi!

The final but critical question is who the auditors were and what is their reaction to the scandal? From 1990-99 the auditors were Grant Thornton International. In 1999, Parmalat was forced to change its auditor under Italian law, and it replaced Grant Thornton with Deloitte Touche Tohmatsu. However, Grant Thornton continued to audit Parmalat’s offshore entities. Neither firm uncovered what was years of accounting fraud. The auditor’s response to the scandal;  Grant Thornton called themselves the “VICTIM” of the deceit and Deloitte pointed out that they first raised the questions about Parmalat’s accounts on Oct. 31, 2002 (almost 3 years after they first became the auditors!). 

TUI maintains that they have good working relationship with KPMG. KPMG on the other hand said that relations with some of TUI’s directors had become more strained after the incident. Definitely in this case TUI is not letting bygones be bygones.

The key issues uncovered were relating to the funds maintained by the county, expenditures related to different funds and lack of compliance of the competitive bid law in some instances.

More specifically the Commission did not maintain a current and accurate listing of amounts due to individuals held in the fiduciary fund, excess land sales fund and the land redemption fund. The Commission also put through the Capital Improvement Fund expenditures of the nature of general repairs, maintenance and operations that are not allowable expenditures for this restricted fund. Some of the expenditures from this fund were not supported by adequate documentation. Also the Commission pad at least $61,000 for supplies and $24,000 for food for the Jail without letting bids as required by the Alabama Competitive Bid Law.

Auditors found accounts payable and expenditures were overstated by more than $1 million in the general fund, and they found similar issues in other funds.  Auditors also questioned some leave and comp time reports.

The Commission blamed the accounting errors on switching to a new computer system and promised to reevaluate the bidding process.