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  Case 41: Livedoor (Japan, 2006)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …in Japan’s corporate history. Never before has a home-grown Japanese entrepreneur fallen so far and so fast as Takafumi Horie, the flamboyant… …33-year-old businessman who had turned his internet company Livedoor into a household name. For many younger Japanese, Horie represented a new model of… …tors, including people buying stock for the first time, because of Horie’s charis- matic appeal. As the author of several best-selling advice books (such… …Koizumi even asked him to run in the 2005 national election as a poster boy for economic reform. However, Horie also had a history of upbraiding… …only dream of. In 2005, Horie grabbed headlines when he started a hostile takeover bid (still rare in Japan) for Fuji TV, one of the country’s biggest… …price: the deal involved a publishing firm that Live- door apparently already owned. Livedoor had arranged for an investment group it controlled to buy… …under the pretext of swapping them for shares in two firms that Livedoor was targeting for takeover. However, the share swaps were bogus. Finally… …, Horie was accused of falsifying the company’s accounts. The alleged fraud centred on Livedoor’s group financial statements for the business year ending… …Accounting Fraud in Asian Companies 242 hours for three months because of capacity problems. The TSE announced to put Livedoor on monitoring status, and… …, in April 2006, Livedoor lost its listing. The TSE said the company had so far failed to clear up the suspicions that it had deceived investors…

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  Case 42: Nikko Cordial (Japan, 2007)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …third-largest stockbroker- age group. As one of the nation’s leading securities houses, it should have been set- ting a good example on corporate disclosure for… …misrepresentations in the brokerage group’s filings for the period ended March 2005. In response to this, the Tokyo Stock Exchange placed Nikko Cordial’s shares on… …supervised status as it investigated whether the violations met the criteria for delisting. In the weeks to come, the share price plunged on speculation that… …con- vertible bond to NPI, which later on booked USD 136 million as a valuation gain on Bell Systems 24 shares for the business year through March 2005… …Nikko Cordial’s stock was on supervised status for a long time. But the com- pany’s desperate action seemed to have given the TSE an unfavourable… …, economics professor at the Saitama University, said the charges against Nikko Cordial were serious enough for delisting. He said he be- lieved Nikko’s… …of just USD 4.2 million – a pittance by U.S. standards. And, although in monetary terms, the fraud was some eight times greater than, for… …2007, Nikko’s new president, Shoji Ku- washima, apologized for the trouble caused to investors, and promised that Nikko would do its utmost to… …meeting was the first since Nikko Cordial became a subsidiary of U.S. financial giant Citigroup Inc., which had successfully completed its takeover bid for…

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  Case 43: Sanyo Electric (Japan, 2007)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …Electric Co. struggled with heavy financial losses as it faced a brutally competitive pricing market for many of its products. These products (including… …cheaper alternatives made in China and other Asian countries. For the fiscal year that ended in March 2004, Sanyo posted a net profit of USD 11.6 million… …should have accounted for USD 1.5 billion in subsidiaries’ losses in 2004 but booked only around USD 400 million, thus falsely reporting a profit when it… …(SESC) about its past accounting. Sanyo announced that the SESC was investigating it for allegedly failing to account for valuation losses made on… …restate its earnings for the four years between 2000 and 2004. The investigation was a blow to Sanyo at a time when it made great efforts to turn… …around its business, trimming thousands of jobs, reducing factory space and drop- ping some weaker non-core businesses. The news sent investors running for… …investigation also caused Fitch to put Sanyo’s BB+ rating on a watch list for a possible downgrade. The Sanyo investigation followed recent news of dubious… …whether all this can snowball into a Japanese Enron,” said one analyst. Sanyo’s auditor for the period during which the reported accounting irregularities… …temporarily after being implicated in financial statement fraud at Kanebo, the cosmetics firm. It had also been the auditor for Nikko Cordial, which had to… …world’s most power- ful 50 businesswomen in both 2005 and 2006. She resigned “for personal reasons”, and a Sanyo spokesman said the resignation was not…

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  Case 44: Satyam Computer Services (India, 2009)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …confessed to vastly inflating profits “for years” with fictitious assets. Raju said that (among other things) USD 1.04 billion, or 94% of the cash/bank… …scan- dal was quickly labelled as “India’s Enron”. “This is the saddest say for investors,” said one market analyst. “The fraud has badly shaken their… …outsourcing solutions to nearly 700 clients, including 185 “Fortune 500” companies. Thus, it served as the back-office for some of the largest banks… …responsible for clients’ finances and accounting.) “For years, Ramalinga Raju was lionized as one of the whiz-kids of the Indian IT sector,” said one… …lents were, in fact, made out of thin air. Revenue for the quarter was 20% lower than reported, and the company’s profit margin was a fraction of what it… …Satyam or its multinational auditors, PricewaterhouseCoopers, was more to blame for the scandal. “It’s hard to miss USD 1 billion of cash,” said Dennis… …was blacklisted for eight years by the World Bank for installing spy software on some World Bank computers and providing improper benefits to bank… …staff. – Merrill Lynch, the U.S. investment bank, was engaged by Satyam to explore merger opportunities for the IT outsourcing giant. But within just… …accounting irregu- larities, which prompted our decision,” a spokesman for Merrill said. – There were some oddities in Satyam’s books, like erratic… …fluctuations in the amount of “unbilled revenue” the company reported. (Unbilled revenue is work done for a customer but not yet invoiced: it represents future…

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  Fraud Theories

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …accounting fraud, for example, the incentive/pressure might be the need to make earnings look better in order to meet debt covenants. The oppor- tunity might… …financial hump”. Cressey developed a three-pronged framework, commonly known as the fraud triangle, which is a very useful tool for fraud-fighters seeking to… …conditions � Excessive pressure for management to meet the requirements or expectations of third parties � Management‘s personal financial situation… …for a person to actually commit a fraud. The absence of any one of them would not allow a person to perpetrate a fraud. However, the three… …effective risk management policies) is decisive for any fraud prevention program. Moreover, opportunity often represents the only element an organization… …. Eventually, in some cases, the motive for accounting fraud is also the “challenge to beat the system”: the fraudsters think that they are smarter than anyone… …fraudster’s internal dia- logue that provides the self-justification for his malfeasance. Such attempts at pro- spective excuse have been termed “techniques of… …neutralisation”: neutralisation paves the way to fraud by nullifying moral objections. For example, in the case of accounting fraud, a perpetrator might say… …: Fraud Case Analysis: Lessons Learned 278 – “There is no harm done. Nobody will get hurt.” – “It’s for a good purpose.” – “We’ll fix the books as… …organization must furnish the ability to exploit the opportunity for fraud. More specifically, the person must have the ability to circumvent (or “to…

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  Chapter 4: Conclusion and Outlook

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …book “The Moral Sense” with the insightful observation that two conditions must hold for a public scandal to occur: the event must be unusual (that is… …convictions for malfeasance is small relative to the total number of firms in existence. Thus, referring to Wilson, we may conclude that the accounting frauds… …led away in handcuffs under indictment for fraud was shocking indeed, and society was outraged at the criminal acts. Most of the scandals occurred… …sible for fighting fraud, one inevitable reality remains: “fraud happens”. It is a given that economic crime will always be with us. Eliminating fraud is… …impossible to turn back. Of course, the perpetrators are looking for a way out. They hope that the future will help them, but the passing of time only makes… …the fraud bigger. In other words, there is no good “exit strategy”. A well-constructed and well-orchestrated fraud typically will succeed for a… …guidelines for “best practice” in fraud risk management. For a summary of basic anti-fraud strategies, see Exhibit 9 (the definitions are extracted from… …, supervision & monitoring, and the active search for potential fraud Early Warning: Being alert to any patterns of unusual or illegal business practices… …; spotting the indicators (“red flags”) that call for immediate scrutiny Fraud Deterrence: Creating an environment where people are discouraged from… …, understand and agree to, is an important step. However, merely publicizing the need for integrity won’t bring it about. The code of conduct has to be…

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  Introduction

  Professor Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …. According to PricewaterhouseCoopers’ “Global Economic Crime Survey 2007”, fraud remains one of the most problematic issues for companies worldwide. In the… …, fraud and its associated reputation risk will continue to be a focus for businesses around the world. However, given the ongoing growth of globalization… …and “store” profits during good years for use during slower years Creative Accounting � Any and all steps to play the financial numbers game… …with “fraudulent financial reporting” Exhibit 1: Common Labels for the “Financial Numbers Game” (Mulford/Comiskey) At first sight, the term… …creative accounting may imply something less troubling than, for example, fraudulent financial reporting. However, that is not the case. Creative… …to be fraudulent or not. Nevertheless, the other terms in Exhibit 1 may differ in legal and ethical severity. Fraudulent financial reporting, for… …disregard for accepted accounting or disclosure standards Fraudulent financial reporting Knowingly failing to comply with GAAP; intentional wrongdoing… …further define the responsibilities for detecting and preventing accounting fraud within organizations. As a consequence of the increased legal and… …regulatory requirements, there is a growing demand for professionals who have greater fraud awareness, as well as more in-depth knowl- edge and skills related… …addition, this book will also be beneficial for academic institutions and profes- sional training providers who want to enhance their fraud and forensic…

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  Case 1: McKesson & Robbins (1938)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …society. Philip Musica’s criminal career began early. By his 30th birthday, he had been con- victed of fraud twice. The first conviction was for… …5,000 and sentenced to one year in prison. The “cheese case” made a small flurry in the local newspapers. The second conviction was for using forged… …invoices to obtain large bank loans. Again, Philip Musica took the whole blame and pleaded guilty. From 1913 to 1916, he stayed in jail for the second time… …urged Musica (alias F. Donald Coster) to seek their party’s nomination for U.S. President, but Musica turned down the offer to run for President on the… …treasurer. He would transfer money between numerous company bank accounts to create the appearance of cash pay- ments for purchases and cash receipts from… …customers. For each sale, McKesson & Robbins’ crude drug division paid W.W. Smith & Co. a commission of 0.75%. The four brothers divided these commissions… …, but the now disgraced drug-tycoon decided not to go to jail for a third time. On the morning of December 16, 1938, he locked himself in the… …. Companies 28 Moreover, the McKesson & Robbins fraud led to significant changes in procedures for appointing auditors. In 1939, the SEC recommended that… …the time of the McKesson & Robbins scandal, the subsequent sixty years were a time of unprecedented prosperity for auditors. The scandal prompted…

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  Case 2: ZZZZ Best Company (1987)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …business by his mother who worked as a telephone solicitor for a small carpet-cleaning firm. At the age of 16, in 1982, while still in high school, he… …company and collect insurance money. He stole his grandmother’s jewel- lery and sold it for USD 2,000. When he urgently needed cash in 1984, he forged… …1985, Minkow opened a merchant’s account at a local bank, which allowed him to accept credit card payments. For the next few years, whenever he… …blamed the forgeries on un- scrupulous subcontractors or crooked employees, paid up and carried on. Almost since the day he opened for business, Minkow… …snowball. People magazines caught on, and business magazines, and the LA mayor – with the plan for a civic celebration of youthful brilliance that caught… …bothered to check his background thoroughly; nobody was in the mood for asking questions – which was unfortunate, because Minkow would have had difficulty… …accounted for 90% of ZZZZ Best’s reported profits. In fact, these contracts were imaginary and ZZZZ Best actually did no renovation work. Initially, Minkow… …, and presented them to the auditors as typical examples of the company in action. For example, Minkow’s subordinates would place ZZZZ Best placards on… …the walls, pay the buildings’ security officers to greet the visitors and arrange for a tour of the sites, and would stand around with rolls of carpet… …convincing show, and the auditors gave ZZZZ Best a clean audit opinion. Ernst & Whinney was among the parties most vilified for their role in the scandal…

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  Case 4: MiniScribe (1989)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …the company had reported a USD 14.6 million loss for the fourth quarter of 1988. Wiles told the board members that the com- pany’s problems were “far… …worked for the San Francisco venture capital and investment banking firm Hambrecht & Quist. Wiles had a reputation as a trouble- shooter of rare… …stock quintupled, becoming a Wall Street favourite. MiniScribe appeared to have achieved a remark- able turnaround. “It looked for three years like Q.T… …started to smell trouble, the new management initiated an in-house investigation into the reliability of MiniScribe’s financial reports for 1986… …. Eventually, the new CEO, Mr. Rifenburgh, admitted pub- licly that the financial statements for the previous three years were misstated. In fact, the… …existing records and documentation were so inadequate that it was extremely difficult for a specially appointed independent evaluation committee to… …produce reliable financial statements for those years. According to the evaluation committee, MiniScribe had used a series of bizarre methods to falsify… …at the end of a quarter to boost sales (a practice known as “channel stuffing”), MiniScribe went far beyond that. On multiple occasions, it shipped… …to a shipment in Far East, when in fact, title would not change until the disk drives were delivered in the United States. MiniScribe, however… …Canada as “just in time” suppliers for distributors. These just in time operations were not under the control of the distributors; the number of…

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