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!
July 25th, 2010
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.
November 2nd, 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.
March 2nd, 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.
February 21st, 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.
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
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