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  A Practice Aid for Company Executives: The Ethics Barometer

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …290 Appendix: Practice Aids Appendix I A Practice Aid for Company Executives: The Ethics Barometer It is essential that the board and… …. However, it is advisable to tailor the content of the barometer to the situation in which the organization finds itself. For achieving customization… …terms of ethi- cal behaviour. I believe that the CEO and the other senior executives are positive role models for the organization. A.2 The… …. A.12 It is easy for me to comply with the company’s standards of conduct because there is a strong level of commitment from top management and… …the company’s standards of conduct. Only people with integrity are considered for promotion. B.16 Performance evaluation criteria at the… …standards of conduct is provided to me when I need it and is clear and easy for me to understand. C.4 The training is effective in guiding my decisions… …: Practice Aids 295 The management team can use the results of the ethics barometer to develop a com- prehensive integrity profile for the organization… …the results be explained? – What did the respondent have in mind when he gave this answer? What could be the reason for the score on this question?… …– What could be the risks for the score on this question? – When would we be satisfied with the score on a question? What is the target? – In what… …results be broken down? – Should the results be communicated externally, for example in the company’s corporate social responsibility report? In…

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  A Practice Aid for Auditors: Fraud Interviews – An Inquiry Guide

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …Appendix: Practice Aids 297 Appendix II A Practice Aid for Auditors: Fraud Interviews – An Inquiry Guide Of… …pen or making a few photocopies for private use. Do you believe fraud is a problem for business and society in general? – We know that fraud… …processes that are under- going significant changes (restructuring, competition, management and/or employee turnover, etc.) that may provide opportunity for… …report to? – Has management reported to the audit committee on the process for identify- ing and responding to the risk of fraud? Has management reported… …unintentional? How were they discovered? What were the reasons for them? What corrective measures have been implemented? (4.) Questions to ask the Head of… …What has been the company’s response? – What is the audit committee’s understanding of the risks of fraud, including those transactions for which a… …risk of fraud may be likely to exist? – How does the audit committee exercise oversight of the management’s process for identifying and responding… …of company’s assets) of any member of senior management or any employee who plays a key role in the com- pany’s financial reporting process? – For… …reporting channels has the company established for unethical or fraudu- lent behaviour? Are such channels effective? What has been reported? What has been… …, guidelines for whistleblowing, and related party trans- actions? – How often are employees trained in the above programs and controls? What specific…

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  The Warning Signs of Fraud

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …described in this book the signs of impending doom have been apparent for some time – for those who wished to see them. According to numerous fraud… …in jurisdictions where differing laws and cultures exist – Significant bank accounts or subsidiary operations in tax-haven jurisdictions for which… …transactions – Inadequate physical safeguards over cash, inventory, or fixed assets – Lack of mandatory vacations for employees performing key control… …– A practice of creating expectations in, for example, overly optimistic press releases or annual report messages – A practice of committing to… …stock options) being contingent upon achieving aggressive targets for stock price, operating results, financial position, or cash flow – Significant… …disrespect for regulatory bodies – Failure to identify business risks on a timely basis and/or to adequately moni- tor identified risks; failure to pay… …/ purchases) x 365 – Allowances for sales returns, warranty claims, etc. that are shrinking in percentage terms or are otherwise out of line… …with industry peers Fraud Case Analysis: Lessons Learned 274 – Allowances for bad debts, excess and obsolete inventory, etc. that are shrink-… …performance 3.2.2 Advantages and Limitations of the “Red Flags Approach” The use of red flags checklists is wide-spread today, in textbooks for accounting… …students as well as in practice aids for auditors. Regarding the advantages of red flags, there is general agreement that they (1) appropriately raise the…

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  Case 3: Crazy Eddie (1987)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …financial statement fraud of all time, but for outrage- ousness, it is going to be very hard to beat.” In 1969, Eddie Antar, a 21-year old high school… …appetite for videocassette recorders, digital television sets and compact disk players. Antar’s razzle-dazzle openings of new stores, and more important… …finance his aggressive expansion program. However, the underwriting firm delayed Crazy Eddie’s IPO for more than one year after discovering that the… …of the Antar family (for example, Eddie Antar had hired his cousin, Sam E. Antar, to serve as Crazy Eddie’s chief financial officer). Besides, certain… …individuals, including Eddie Antar’s wife and mother, were receiving huge salaries for little or no work. Accounting Fraud in U.S. Companies 37… …Street. At every opportunity, Eddie Antar painted a picture of continued growth and increased market share. Yet the boom days for the consumer… …two prominent financiers gained control of Crazy Eddie, and, for the first time, the company was out of Eddie Antar’s hands. Less than two years after… …major suppliers (beholden to Crazy Eddie’s for large numbers of business) cooperated. When auditors attempted to confirm their receivables, the… …the end of a period to falsely inflate sales revenues. Conversely, the liabilities for a given period were often not reported until the next period… …. – Concealed liabilities: Antar regularly stashed unpaid bills in his desk. The liabilities would be entered after the year-end or held for long…

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  Case 7: Waste Management (1997)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …scandal that is far more than just a financial history lesson. It portrays a multiyear effort to inflate reported profits at Waste Management, Inc. (WMI)… …client too hard. Accounting Fraud in U.S. Companies 56 For example, in its 1993 audit, Andersen quantified misstatements of USD 128 mil- lion… …company had previously worked as an auditor at Andersen. – During the 1990s, 14 former Andersen employees worked for WMI, most often in key financial… …personal style that fit well with the Waste Management officers”. During his tenure as engagement partner for WMI, Allgyer held the title of “Partner in… …Charge of Client Service” for Accounting Fraud in U.S. Companies 57 Andersen’s Chicago office and served as marketing director. In this position… …additional fees for “special work”. – Between 1991 and 1997, Andersen billed WMI approximately USD 7.5 mil- lion in audit fees. Over this seven-year period… …, the billings to WMI for audit and non-audit ser- vices.) However, the review was virtually ignored by WMI; a board member who had approved the review… …, associate director of the SEC’s division of en- forcement. “For years, these defendants cooked the books, enriched themselves, preserved their jobs and duped… …– failed to record expenses for decreases in the value of landfill sites as they were filled with waste – refused to record expenses necessary to… …write off the costs of unsuccessful and abandoned landfill development projects – failed to establish sufficient provisions to pay for taxes and other…

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  Case 8: Sunbeam (1998)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …as Sunbeam, Oster, Mr. Coffee, Coleman and First Alert, will long be remembered as more than a household name for electric appliances and camping… …equipment. Probably for years to come, the name “Sunbeam” will bring to mind a company that was notable for more than a decade of mismanagement and that… …by more than 200%, increasing the company’s market value by USD 6.3 billion. The company was then sold to Kimberly-Clark for USD 9.4 billion, with… …for protection under Chapter 11 of the U.S. Bankruptcy Code. The SEC said that Dunlap and Kersh used numerous improper tactics to inflate earnings… …restruc- turing, leading to understated results for 1996 and higher results for future years. For example, among the costs included in the restructuring… …charge were unreason- able write-downs of inventory and fixed assets. Also included were provisions for future environmental and litigation costs that… …should not have been included in a charge taken in 1996. These bogus reserves (“cookie jar reserves”) increased Sun- beam’s reported loss for 1996 and… …to create the impression that Sun- beam was experiencing revenue growth, Dunlap and Kersh caused the company to recognize revenue for sales that did… …exchange for a discount) agreed to purchase barbecue grills six months before they were needed and to pay for them six months later – not within 30 days… …, as the SEC’s guideline for bill-and-hold-accounting stated. The grills were parked over the winter months in warehouses leased by Sunbeam be- cause…

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  Case 10: MicroStrategy (2000)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …Accounting Fraud in U.S. Companies 71 Case 10: MicroStrategy (2000) In 2000, the reversal of fortune could not have been greater for… …and CEO, Michael Saylor, gained widespread attention for his announced plan to donate USD 100 million to start an Internet university that would… …provide “free education for everyone on earth, forever” and that would compete with the Ivy League. On March 10, MicroStrategy’s stock reached USD 333 per… …in the United States, exalted in the media for his business success. But even as he basked in the limelight, Saylor knew that MicroStrategy had… …some problems. In October 1999, the Center for Financial Research and Analysis (CFRA) had warned investors about an unusual revenue-gathering… …it would restate its financial results for the fiscal years 1997, 1998 and 1999. The restatement reduced revenues over the three-year period by USD… …earnings, turning profits into losses for each of the three years. In 1999, the effect on the company’s financial position was particularly significant… …that the company had not been in compliance with the primary rule on revenue recognition for software companies, SOP 97-2, which had been issued by the… …SOP 97-2 in connection with these “multiple-element deals”. In several transac- tions, the company accounted for the software product element as though… …, although the contracts called for the company to deliver extensive services over time. Additional reporting failures included the recognition of…

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  Case 11: American Tissue (2001)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …September 2001, American Tissue filed for Chapter 11 bankruptcy protection. A consultant of the restructuring firm that tried to revive American Tissue (but… …Iranian immigrants, Mehdi Gabay- zadeh and Nourollah Elghanayan, with Gabayzadeh being responsible for running the daily operations. The families of the… …distressed plants, cutting payrolls at others, waiting until the last minute to pay suppliers – garnered them reputations for ruthlessness. For example… …, loggers in northern New Hampshire developed a keen antipathy for Gabayzadeh after he told them that he would pay them whenever he wanted for their lumber… …defrauded its employees by deducting money from workers’ salaries for medical insurance and 401 (k) retirement plans, but never making the required payments… …. However, for a time, these methods seemed to work. But the company was chronically short on cash. Beginning in 1999, American Tis- sue faced severe… …sales, ATI executives contacted certain customers and asked them to furnish phony purchase orders. – Finally, the annual report for fiscal year 2000… …Gabayzadeh and Elghanayan families. As a result, the affiliated companies were not liable for American Tissue’s debt, even though they benefited by receiving… …from ATI to Super American Tissue, its ultimate parent, when customers made cash advances to Super American Tissue for inventory shipped to them by ATI… …. In a separate lawsuit, Elghanayan was accused of constructing a transaction that saw ATI buy machinery for USD 3.3 million, and then sell it to…

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  Case 12: Enron (2001)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …out as the poster child for corporate fraud. The crimes of Enron’s top executives resonated the most in the public mind, and the company’s name has… …supply and the price, charging fees for the transactions and assuming the associated risks. During the 1990s, Skilling implemented the plan, transforming… …online trading model, “Enron Online”, enabled the company to develop fur- ther its abilities to negotiate contracts. Eventually, Enron also reached beyond… …of the rapid transformation from a sleepy bricks-and-mortar pipeline business into an energy-trading juggernaut, Enron was rated for several… …revealed that his ultimate goal was for Enron to become “the world’s greatest company”. Enron’s abrupt downfall: A timeline of critical events… …opportunity for the large trad- ing gains that had formerly made Enron so profitable. Throughout early 2001, Enron’s stock price drifted lower. Yet in spite… …to nearly zero. The following table lists some of the critical events for Enron’s demise between February and December 2001 (see Healy/Palepu 2003, p… …(its first quarterly loss in more than five years) after taking huge nonrecurring charges to reflect asset write-downs for poorly performing businesses… …(primarily for the water and broadband businesses). It also disclosed a mysterious USD 1.2 billion reduction in shareholder equity, mainly as a result of the… …administrators for its employees’ 401 (k) pension plan, thus by law locking their investments for a period of 30 days and preventing workers from selling their…

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  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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