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• eBook-Kapitel aus dem Buch Accounting Fraud

  Case 13: WorldCom (2002)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …Accounting Fraud in U.S. Companies 93 Case 13: WorldCom (2002) When Enron collapsed at the end of 2001, worried investors searched for who… …reverberations of the fraud would echo around the world of business for years to come. Background: WorldCom from 1983–2002 The fraud was the consequence… …that USD 2 billion was never author- ized for capital expenditures. She raised her concerns with WorldCom’s auditor, Arthur Andersen, but she was told… …. Accounting Fraud in U.S. Companies 95 WorldCom announced that it intended to restate its financial statements for 2001 and the first quarter of… …. Ultimately, the NASDAQ halted trading on the stock. On July 21, 2002, WorldCom filed voluntary petition for reorganization under Chapter 11 of the Bankruptcy… …later, WorldCom announced that it had dis- covered an additional USD 3.3 billion in improperly reported earnings for 1999, 2000, 2001, and first quarter… …that the total amount in the accounting fraud was approaching USD 11 billion. Thus, in total dollars, the fraud was far bigger than Enron’s. The… …costs. From 1999 to 2001, they accounted for more than half of the company’s total expenses. As a result, WorldCom management and outside analysts paid… …WorldCom for its success and reputa- tion. In terms of the total amount of fees charged to clients, WorldCom was one of Andersen’s top 20 engagements and… …financial statements, USD 6.6 million for audits required by law in other countries, and about USD 50 million for consulting, litigation support and tax…

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  Case 14: Dynegy (2002)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …energy-trading activity resulting from fraudulent “round-trip” or “wash” trades, and (2) Dynegy’s improper accounting for a complex web of financing transactions… …, known as “Project Alpha”. Dynegy’s round-trip energy trades In May 2002, the SEC began to scrutinize Dynegy for two massive electricity trades… …that the company had made with a unit of CMS Energy Corp. in November 2001. The trades, which occurred at the same time for the same price and traded in… …Alpha”. The push for Alpha had come in fall 2000 when some energy analysts noticed a widening gap between Dynegy’s net income and operating cash flow… …could not be recorded as operating cash flow. They excluded Andersen from meetings in which Project Alpha was dis- cussed and even went so far as to… …bought natural gas from ABG Supply at below-market prices for the first nine months; Dynegy, in turn, would then resell the gas at market prices… …loan was embedded in its promise to pay above-market prices for the remaining 51 months of the contract with ABG Supply. In 2001, this manoeuvre… …operations were generating far more cash than they actually were. Furthermore, it concealed from the investing public the true extent of the gap between its… …experts charged in the Alpha scheme pleaded guilty to conspiracy and agreed to help prosecutors. Gene Foster, a vice president for taxation, was… …tax expert, however, became the poster child for what some perceived as excessive punishment for white-collar crime: Jamie Olis, a tax-planning…

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  Case 15: Xerox (2002)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …Accounting Fraud in U.S. Companies 106 Case 15: Xerox (2002) For most of the second half of the 20th century, the Xerox Corporation was a… …copier). Xerox was defined as “the copier company” in its very DNA, and it was even in the dictionary as a syno- nym for photocopy. The copiers were “money… …machines” nonpareil. The 1990s, however, would be a time of crisis for the company. It was confronting intense product and price competition from its… …reputation for good quality and low cost copiers, and soon began to impact Xerox’s once dominant market share. Moreover, Xerox fumbled the digital future… …, for example by badly underestimating the growth of desktop computing and the inkjet printer (a device around which Hewlett-Packard built a hugely… …focus on high-margin, high-end copying equipment. To succeed in the new digital age, the company needed to reinvent itself. However, it was far better at… …proclaiming the need for change than actually making change. Attempts to buy its way into new businesses were equally unsuccessful. The investment climate… …agitating for sharp reductions in its bloated payroll. Some 9,000 jobs were to be eliminated, 10% of the company’s workforce. But the internal… …, but found some “accounting discrepancies”. As a result, Xerox ultimately adjusted its consolidated financial statements for the last three years… …virtually every reporting period since 1997. “For Xerox, the accounting function was just another revenue source and profit opportunity,” SEC enforcement…

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  Case 17: Global Crossing (2002)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …Accounting Fraud in U.S. Companies 118 Case 17: Global Crossing (2002) Had the attention not been for Enron (the scandal that had it all at… …Crossing abruptly collapsed into bankruptcy in early 2002. On January 28, the company filed for Chapter 11, making it one of the biggest bankruptcies in… …. Global Crossing, riding the mania for fiber optics, soared from nowhere in 1997. Its business plan was to construct a state-of-the-art global fiber optic… …clear that there were not enough customers paying for the network, Global Crossing began its descent. Ultimately, the company had to acknowledge that it… …other words, irrevocable rights to use a specific amount of capacity for a specific time period. But by early 2001, the company’s ability to sell… …separate and independent contracts; Global Crossing and the other carrier also exchanged cash for the IRUs, even if the amounts of capacity exchanged were… …the same or Accounting Fraud in U.S. Companies 119 similar. In the second quarter of 2001, for example, reciprocal transactions ac- counted… …for 32% of Global Crossing’s cash revenue (which was one of its principal pro-forma financial results). Without these transactions, the company would… …several reciprocal transactions, it purchased capacity that would not be ready for service until some time after the end of the quarter (in some cases… …, not for months), because the capacity was not yet constructed, was still under construction, and/or required governmental approvals. Finally, in at…

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  Case 18: Qwest Communications International (2002)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …strategies for swaps of communica- tions capacity. These swaps, many of which were designed in conjunction with the independent auditors, allowed the… …companies to convince investors that their busi- ness prospects were not deteriorating, despite a rapid erosion of prices for their core product, fiber optic… …capacity as an investment. Doing so had the effect of inflating reve- nues, making it seem as if the communications markets were far more robust than they… …aries even further: instead of accounting for revenue from these deals over the life of the contracts, Qwest accounted for much of it upfront, producing… …increasingly reliant on capacity swaps. For example, in late 2001, an analyst at Morgan Stanley had questioned whether many of the swaps (also known as “Lazy… …deals. Soon thereafter, the company’s board ousted CEO Joseph Nacchio, and admitted that Qwest had incorrectly accounted for at least 220 swap… …of USD 1.9 billion in August 2002, a 98% decline for the period. In September 2002, the company announced that it would restate its financial… …. “Accounting rules, policies or controls that in- terfered with meeting revenue targets were stretched or ignored outright, creating an environment for fraud.”… …through increases in recurring revenue, it directed the sale of portions of Qwest’s fiber optic network originally held for own use. Thus, Qwest began… …selling what the company had previously identified as its “principal asset”. Unlike recurring revenue that produced a predict- able amount of revenue for…

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  Case 21: HealthSouth (2003)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …expectations for 48 consecutive quarters. That unerring track record could have been attributed to predictable opera- tions or legal income-smoothing techniques… …, but hindsight proved otherwise. It be- came apparent that for many years, HealthSouth’s financial disclosures had neither represented economic reality… …maintain the market price for its stock. According to the SEC complaint, HealthSouth’s senior officers would, on a quar- terly basis, present CEO… …Scrushy with the actual, but as yet unreported earnings for the quarter as compared to Wall Street’s expected earnings. If the actual results fell short… …the patients and the amounts that various healthcare insurers would actually pay for a specific treatment. HealthSouth deducted this amount from… …difficult to trace for the outside auditors. Correspondingly, HealthSouth’s senior accounting personnel recorded false entries to the fixed asset books… …the AP Summary line items at various facilities by different amounts. When the auditors asked Health- South for a fixed asset ledger for a particular… …identified, among other things, at least USD 1.3 billion of improper accounting for reserves, executive bonuses, and related-party transactions. The… …forensic experts (brought in by HealthSouth’s law firm to unravel the scheme) described the recipe for the fraud as follows: take legitimate numbers… …“Transmittal 1753”) for reduced future earnings. Transmittal 1753 Accounting Fraud in U.S. Companies 140 required certain healthcare providers to bill…

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  Case 23: Computer Associates International (2004)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …and other organizations. According to the company’s annual report for the fiscal year ended March 31, 2004, more than 95% of the Fortune 500… …. However, the company’s top executives were known for their aggressive styles, which led many customers (and employees) to complain about Computer… …, and two other top executives. The SEC alleged that from at least 1998 to 2000, Computer Associates routinely kept its books open for several days… …lasted longer). Sometimes, the company concealed this practice by using contracts that falsely bore pre-printed signature dates for the last day of the… …, remov- ing fax time stamps before providing agreements to the outside auditors. In early 2000, for instance, Computer Associates signed a USD 44.5… …license during the contract’s term, the company would recognize revenue for the entire new license without removing from its books revenue from the… …unexpired portion of the old license. Accounting Fraud in U.S. Companies 151 For contracts under its pre-2000 business model, Computer Associates… …recognized all the license revenue called for during the duration of the contract upfront. How- ever, in 2000, the company adopted a new business model, under… …sulting contract” for an unnamed executive at a customer company who knew of Computer Associates’ accounting improprieties. This executive had arranged a… …that those lawyers would repeat the false explanations for fraudulent accounting practices to government investigators. “This was the most brazen and…

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  Case 24: AIG (2005)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …“Hank” Greenberg was credited with vastly expanding the company, turning it into one of the world’s largest and most revered insurance firms. For decades… …, Green- berg was one of the most senior players in the insurance field. AIG had a long-time reputation for solid growth and reliable results despite being… …. The SEC charged Greenberg and CFO Howard Smith for their involvement in several improper accounting transactions that inflated AIG’s reported financial… …Re” transactions Questions about legitimate reinsurance (which is “insurance for insurance” and is intended to spread out risk) lay at the heart of… …the Gen Re case. In 2000, after analysts had criticized AIG for its declining loss reserves, Greenberg initiated two reinsurance transactions with… …a foreign subsidiary of Gen Re (a Connecticut-based holding company for global risk management operations). The transactions were structured to make… …fact, according to the SEC, the transactions had no economic substance, amounting to a mere round-trip of cash. However, by accounting for them… …convert underwriting losses into capital losses, AIG overstated its underwriting profits for its general insurance operations in 2001 by over 100%… …income, one of its key financial barometers, for the 2001 fiscal year. A similar set of transactions falsified AIG’s capital gains. In these… …a result of these bond transactions, AIG materially understated its reported real- ized capital losses for its general insurance segment for the 2001…

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  Case 25: Bernard Madoff (2008)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …Ponzi scheme. On December 11, 2008, Bernard L. Madoff, a trading powerbroker for over four decades and a Wall Street legend, was arrested by the FBI… …the fraud was far beyond the reach of all of the other recent scandals of the financial system. Bernard Madoff started his financial career at… …whom had worked for their father for two decades – that customers had requested USD 7 billion in investments to be returned, and that he was struggling… …. However, the financier who gave his name to the swindle, Charles Ponzi, went to jail in 1920 for having defrauded approximately 40,000 customers. Ponzi… …Jewish community) and large financial institu- tions. And whereas Charles Ponzi was able to swindle for only six months, Madoff ran the scheme for at… …Wall Street, there had been scepticism for years over how Madoff managed to pay such consistently high Accounting Fraud in U.S. Companies 161… …held by members of the Madoff family. For example, Madoff’s brother Peter was the chief compliance officer for both the broker-dealer and the… …. – There were growing suspicions about Madoff’s business in the press. For example, a May 2001 article in a monthly industry publication (titled… …enthusiasm for investing with Madoff. – In 1999, a competitor called Harry Markopolos (who was irked by Madoff’s claims of too-good-to-be-true returns)… …. Nevertheless, the auditors of the feeder funds contended that their work conformed to all professional standards. The executive director of the Center for…

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  Case 26: Juergen Schneider (Germany, 1994)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …over mismanagement and fraud emerged in Germany, but the “Schneider case” was by far the biggest. The case is linked to an exceptional bank scandal. In… …the 1980’s, Dr. Juergen Schneider managed to ob- tain credits for a number of inadequately secured projects. The banks were bluffed by his clever… …for several years before collapsing and casting Schneider under the suspicion of credit fraud, fraudulent invocation of bankruptcy and tax evasion. He… …glass-and-steel buildings, like the “Zeil-Gallery” in Frankfurt or a project in the Kurfuerstendamm area of Berlin are still busy land- marks for German shoppers… …his biggest properties were intentionally inflated by bribed outside advisers. For example, in the case of “Zeil-Gallery”, Schneider submitted fake… …rental contracts in an application for a EUR 212 million loan from Deutsche Bank to finance the American-style shopping mall in downtown Frankfurt… …the manipulated documents, the mall would offer 20,000 square meters of space for rent and bring in a rent of EUR 29 million a year. In fact, the… …the affair proved to be very embarrassing for the bank. The report from the auditors, Wollert-Ellmendorff, supported Deutsche Bank’s argument that it… …of the bank. – The documents presented as the basis for individual advances provided insufficient detail and were full of Schneider’s… …optimistic expectations for the project. – Official reports were based on the highest rent for the region and on the assumption that the whole…

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