Internal control issues at Weatherford Int

Mar 28, 2011

Weatherford International Ltd, a Geneva based oilfield services and equipment company, announced that it will be restating its results back to 2007 and delay the 2010 annual report. The delay the company said is due to tax accounting errors stemming from failure of internal controls.

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.

Related Posts

• Repo 105 email exchange
• Another audit firm under attack

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• Accounting Fraud
• Accounting Scandals
• Internal Controls

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Repo 105 email exchange

Feb 17, 2011

I recently read an article about the exchange of emails between executives at Lehman Brothers regarding the Repo 105 practice the company was engaged in. Below are some of the comments of the executives-

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!

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• Internal control issues at Weatherford Int
• Another audit firm under attack

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• Accounting Fraud
• Accounting Scandals
• Balance Sheet fraud
• Lehman Brothers
• Repo 105

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Another audit firm under attack

Feb 3, 2011

In a recent verdict of a nine year legal battle between BDO Seidman and the estate of George Batchelor and the Batchelor Foundation, the jury ordered BDO to pay $91.7 million in damages for fraud and negligence over the firm’s auditing of Grand Court Lifestyles Inc, a company in which Batchelor had made substantial investments. Grand Court went bankrupt leading to huge losses for the investor.

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.

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• Internal control issues at Weatherford Int
• Repo 105 email exchange

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• Accounting Fraud
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CIT Group Inc restates its earnings

Feb 2, 2011

CIT Group Inc, a lending institution, restated its financial statements for the first three quarters of 2010 due to accounting error that the company’s management found.

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.

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• Internal control issues at Weatherford Int
• Repo 105 email exchange

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• Accounting Fraud
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• bankruptcy
• bankruptcy accounting
• Fresh State Accounting

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Healthcare Locum suspends its CFO and founder

Jan 31, 2011

Healthcare Locum, a firm specilizing in suppling healthcare staff and social workers to public and private-sector clients, announced the suspension of executive vice-chairman and founder Kate Bleasdale and chief financial officer Diane Jarvis, amidst discoveries of accounting irregularities.

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.

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• Internal control issues at Weatherford Int
• Repo 105 email exchange

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• Accoun ting scandals
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• Accounting Scandals

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Embezzlement of NT$1 billion in company’s assets

Jan 31, 2011

Just a few days before the Lunar Holiday period begins, the chairman Lin Wei-shan of Tatung Company, one of Taiwan’s leading home appliance makers,  was questioned by prosecutors and investigators for the alleged embezzlement of NT$1 billion (USD 35 M) in company’s assets. According to Banqiao District Prosecutors Office, Lin allegedly embezzled more than NT$1 billion from Tatung in order to pay for a loan owed by another company he founded that was running in debt. After paying the debt owed by the company with the money, Lin promptly disbanded the company in question, a move that had violated the Securities and Exchange Act.

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

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• Internal control issues at Weatherford Int
• Repo 105 email exchange

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• Accounting Fraud
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Complaint against NutraCea

Jan 25, 2011

On January 13, 2011 Securities and Exchange Commission filed a complaint against NutraCea, an Arizona based health foods manufacturer and seller, alleging the company of falsification of its financial statements.

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.

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• Internal control issues at Weatherford Int
• Repo 105 email exchange

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• Accounting Fraud
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• bill and hold sales

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Civil complaint against Ernst & Young

Jan 6, 2011

A civil complaint was filed recently by Andrew Cuomo, the outgoing New York attorney general, accusing Ernst & Young of helping Lehman Brothers mislead investors. The state claims Lehman’s auditors aided in a fraud, using Repo 105 transactions to make the books look healthier than they actually were.

Ernst & Young obviously maintained that they did nothing wrong. Well technically they are right, they did comply with Generally Accepted Accounting Principles, or GAAP.

The crux of the case should be the intent. Recently there has been news about various organizations being caught in accounting fraud, and in most cases the auditors had signed off on the financial statements. Should the auditors be responsible for just ensuring compliance with accounting rules or should they be held accountable to ensure that their clients’ intent is not to hide material facts.

This definitely is a case  accountants all over the world will keep a close eye on. This might define how accounting world would function in the future.

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• Internal control issues at Weatherford Int
• Repo 105 email exchange

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• Accounting Frauds
• Accounting Scandals

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TUI says adieus to KPMG

Jan 3, 2011

TUI Travel, has decided to say adieus to their auditors KPMG. The move comes soon after the company had to take a write-down of £117 million, forcing the company to restate their 2009 results. The company has decided to go ahead and replace the outgoing auditors with PricewaterhouseCoopers.

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.

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• Internal control issues at Weatherford Int
• Repo 105 email exchange

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• Accounting Fraud
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• KPMG
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New rules for insider trading violations and audits of internal control

Dec 20, 2010

The SEC issued two rules in September 2010, in order to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). The rules affect the payment of bounties for revealing insider trading violations and requirements relating to audits of internal control over financial reporting.    

First, the SEC rescinded rules which authorized the payment of bounties for providing information leading to the recovery of civil penalties for insider trading violations, which were previously authorized by the Insider Trading and Securities Fraud Enforcement Act of 1988. In its place, the Dodd-Frank Act established a broader program for monetarily awarding whistleblowers. The new program authorizes the SEC to award persons who provide “original information” that leads to the successful enforcement of certain judicial or administrative actions. Potential awards range from 10% to 30% of collected monetary sanctions. Unlike the former insider trading bounty program which authorized awards only for violations of insider trading laws, the new program authorizes awards for the violation of any federal securities law.

The SEC additionally amended certain rules to conform to the new Section 404(c) of the Sarbanes Oxley Act of 2002 (Sarbanes-Oxley), added by the Dodd-Frank Act, which exempts non-accelerated filers from having to include in their annual reports an independent auditor’s attestation report on internal control over financial reporting. Accordingly, the SEC amended Item 308 of Regulation S-K to require filers to include in their annual reports the disclosure regarding this attestation report only if such an attestation report is actually included in the annual report. Rule 2-02(f) of Regulation S-X similarly clarifies that audit reports need not include an assessment of a non-accelerated filer’s internal control over financial reporting.

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• Internal control issues at Weatherford Int
• Repo 105 email exchange

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• Accounting Frauds
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Ahold fraud

Nov 17, 2010

In February 2003, the Amsterdam based supermarket operator, Ahold announced that it had inflated earnings by atleast €391M ($500M) at its wholly owned US food service subsidiary. Apart from that the company also improperly consolidated revenues from joint ventures. The total effect of the fraud was  €1bn in false profit statements. The fraud was carried out both in US and Europe.

The company’s auditor’s, Deloitte claimed that they were not able to catch the fraud because they were given false paperwork!

In May 2006, three years after the fraud came to light, three ex-Ahold bosses received suspended sentences and €670,000 worth of fines from a Dutch court in May 2006. The executives were found guilty of large scale accounting fraud from 1998-2003.

An interesting statement by the Judge in the trial summarizes the sentiments of all effected by frauds all over the world. Judge Frans Bauduin said the three prosecuted men “have damaged the good reputation of Dutch companies in general and Ahold in particular” and “betrayed the confidence that shareholders…placed in them“. It is so true of any fraud that happens anywhere in the world.

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• Internal control issues at Weatherford Int
• Repo 105 email exchange

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• Accounting Fraud
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VeriFone restates their financials

Nov 17, 2010

In 2009, Silicon Valley technology company, VeriFone settled charges with the SEC concerning the company’s restatement of quarterly financials. In 2007, SEC alleged that the company had released materially false quarterly reports for the first, second and third fiscal quarters of that year.

The allegation states that VeriFone’s former supply chain controller, Paul Periolat, made improper modifications to inventory so that the company could meet its previosuly announced earnings guidance. Periolat allegedly manually adjusted the inventory of a subsidiary for the first quarter of 2007, even though he was aware that the reported inventory was correct. The SEC alleged that Periolat improperly manually adjusted inventories again in the second and third quarters of that year.

On August 19, 2008, the company released the restated financials. Cumulatively, operating income for the three quarters decreased from $65.6 million to $28.6 million, an overstatement of 129%.

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• Internal control issues at Weatherford Int
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• Accounting Fraud
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The case of phantom customers

Nov 11, 2010

A recent report by Muddy Waters ,a small research firm , about RINO International Inc , a desulfurization and other environmental equipment provider to Chinese steel mills, is an interesting read. According to Muddy, RINO’s business is a complete sham. The report states that the company has inflated its earnings, their revenue for 2009 was only $11M or 94% lower than it reported in the US. Many of the company’s customers relationships are non existent.

The report goes on to say that the company’s management is using the company’s resources for personal use, e.g. management “borrowing” $3.2 million to purchase a luxury home in Orange County, CA the day that RINO closed its $100.0 million financing.

Muddy is not in clear waters either, they and some of their clients actually have a short position in RINO’s stock. So if the stock price goes down Muddy and some of its clients stand to have significant gains.

RINO in their defense issued a press release saying that it will be investigating Muddy Waters’ claims and reaffirmed that it will release third-quarter earnings on the 15th.

This definitely will be an interesting topic to keep an eye on. If Muddy’s claims are found to be incorrect, where does it leave Muddy’s credibility; but on the other hand if Muddy’s claim’s are correct, then watch out investors!

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• Internal control issues at Weatherford Int
• Repo 105 email exchange

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• Accounting Fraud
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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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• Internal control issues at Weatherford Int
• Repo 105 email exchange

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• Accounting Fraud
• Accounting Scandals

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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!

Related Posts

• Internal control issues at Weatherford Int
• Repo 105 email exchange

Tags

• Accounting Fraud
• Accounting Scandals

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