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• eBook-Kapitel aus dem Buch Accounting Fraud

  Introduction

  Professor Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …17 Chapter 1: Introduction 1.1 Fraud: A Constant Threat to Companies around the World Fraud is nothing new. History has shown that it has… …long been part of our society. In 1941, a well-known American judge said: “Fraud is as old as falsehood and as ver- satile as human ingenuity.” Several… …years later, in 1949, a criminologist from Indi- ana University named Edwin H. Sutherland coined the term white-collar crime, referring to fraud… …committed by the elite upper-world business executive, against either shareholders or the public. Sutherland, one of the pioneers in fraud research, defined… …indicating that the occurrence of white-collar crime (management fraud) and related aberrational behaviour of em- ployees (employee fraud) has been reduced… …. According to PricewaterhouseCoopers’ “Global Economic Crime Survey 2007”, fraud remains one of the most problematic issues for companies worldwide. In the… …respondents who suf- fered fraud also stated that this had caused significant damage to their businesses. The survey found that the level of damage was… …decreased. Although different sectors are impacted by different types of fraud, no industry is immune from the threat posed by economic crime. The key… …findings of KPMG’s “Fraud Survey 2009” are quite similar: fraud is a ma- jor threat to companies regardless of their size, location, or industry. About three… …out of four executives interviewed by KPMG believed that fraud risks would either stay the same or increase over the next 12 months. Nearly one-third…

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  Case 1: McKesson & Robbins (1938)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …25 Chapter 2: Cases of Accounting Fraud 2.1 Accounting Fraud in U.S. Companies Case 1: McKesson & Robbins (1938) “Like a torrent of… …accounting scandals. The preceding paragraph was published in February 1939 in the wake of the infa- mous accounting fraud at McKesson & Robbins, Inc. Unknown… …December 31, 1937. The mastermind of the fraud was Philip Musica. Born to poor Italian immigrants, he was raised in poverty in the streets of… …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… …bootleg- Accounting Fraud in U.S. Companies 26 gers who bought huge quantities of the company’s products and distilled out the alcohol to make booze… …thing. The fraud centred on the company’s crude drug division: unlike the rest of the company, only Musica and his three younger brothers had access to… …among themselves with Philip Musica, the oldest brother, getting the largest share. The fraud was not discovered until late 1938 when McKesson &… …obtained copies Accounting Fraud in U.S. Companies 27 of the Dunn & Bradstreet credit reports that had been used to satisfy McKesson & Robbins’… …circumstances of the McKesson & Robbins case gave the fraud much publicity. Hollywood set to work on a Musica movie. However, the scandal also led to major… …corporate governance and auditing reforms. Within months of the discov- ery of the fraud, a special committee of the AICPA recommended significant changes to…

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  Types of Fraud

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …257 Chapter 3: Fraud Case Analysis: Lessons Learned 3.1 Types of Fraud 3.1.1 A Classification System for Fraudulent Acts: The Fraud Tree… …Joseph T. Wells, chairman and founder of the “Association of Certified Fraud Ex- aminers” (ACFE), has developed a classification system – known informally… …as the fraud tree – that accounts for all of the most common types of fraud. The fraud tree encompasses a wide range of misconduct by executives… …2007, p. 46; ACFE 2008, p. 7). Occupational Fraud Fraudulent Statements (Accounting Fraud) Asset Misappropriation Corruption Fictitious Revenues… …Economic Extortion Exhibit 3: The Fraud Tree Fraud Case Analysis: Lessons Learned 258 According to Wells, the types of occupational fraud can… …generally be broken down into three broad categories: asset misappropriation, corruption, and fraudulent statements (accounting fraud). Within each of these… …three major categories, there are several sub-categories of fraud scheme types. It should be noted, however, that a number of cases described in… …this book involve aspects of more than one of the three basic categories. For example, several cases involve both accounting fraud and asset… …misappropriation, or both accounting fraud and corruption. In these cases where there are multiple schemes, it is impossible to subdivide the losses in order to… …the property, but has “misappropriated” it. Asset misappropriation is the most common of the three primary categories of occupational fraud…

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  The Warning Signs of Fraud

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …Fraud Case Analysis: Lessons Learned 268 3.2 The Warning Signs of Fraud 3.2.1 A Schedule of Fraud Red Flags In almost all of the cases… …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… …detected more quickly had the warning signs not been ignored. These warning signs are often being referred to as fraud risk factors, fraud risk indicators… …not necessarily indi- cate that fraud is occurring within the organization. Their presence, however, either individually or in combination, could… …indicate the occurrence of fraud or an in- creased likelihood thereof. Red flags should therefore, when encountered, trigger a higher level of… …professional scepticism. The aim of this schedule is to act as an aid to all anti-fraud-practitioners when considering fraud risk mitigation initiatives… …frequency of occurrence. And, to say it clearly, a positive answer to any of the following red flags does not necessarily imply that fraud has occurred… …. Rather, a positive answer indicates that a heightened risk of fraud may exist and further evaluation may be prudent. The schedule was compiled from… …Significant declines in customer demand and increasing business failures in either the industry or overall economy Fraud Case Analysis: Lessons Learned… …, projected, or forecasted results – Overly unstable organizational structure (e.g., high turnover of senior management or board members) Fraud Case…

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  Case 2: ZZZZ Best Company (1987)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …Accounting Fraud in U.S. Companies 29 Case 2: ZZZZ Best Company (1987) The story of Barry Minkow, the amazing teen-age swindler, may… …had been committing fraud. When he wasn’t directly stealing money, he was raising it fraudulently. Nonethe- less, he was able to expand his company and… …even Minkow by surprise. Everything happened very fast. Within four years, ZZZZ Accounting Fraud in U.S. Companies 30 Best (that had started… …pub- Accounting Fraud in U.S. Companies 31 lic, he fooled auditors, investment bankers, brokerage firms, outside attorneys and the SEC alike… …Best’s business was legitimate. However, the bulk of the fraud was concentrated in the company’s sales and receivables (most of which were fictitious)… …unravelled the fraud. The sole practitioner who performed the ZZZZ Best audits before the company went public admitted that he had not inspected any of the… …unfinished building and, astonishingly, completing it in Accounting Fraud in U.S. Companies 32 just 20 days, at a cost of USD 2 million. It was a… …, despite Accounting Fraud in U.S. Companies 33 her persistence, Minkow avoided repaying the small amount. She never forgot the insult and tracked… …counts of racketeering, securities fraud, embezzlement, tax evasion and bank fraud. It also accused Minkow of setting up dummy companies, writing phony… …a victim of mobsters and loan sharks who had taken over his company and forced him to commit fraud. Nonetheless, he was found guilty on all charges…

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  Case 3: Crazy Eddie (1987)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …Accounting Fraud in U.S. Companies 36 Case 3: Crazy Eddie (1987) When Crazy Eddie, Inc., blew up in a financial scandal in 1987, the debacle… …in- volved just about every kind of accounting fraud then known, as well as receipts skimming and money laundering. Although the total dollars involved… …multi-pronged fraud, probably one of the twentieth century’s most infamous frauds. And even though the fraud is more than two decades old, it provides vivid… …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… …individuals, including Eddie Antar’s wife and mother, were receiving huge salaries for little or no work. Accounting Fraud in U.S. Companies 37… …the most frequent manipulations occur in inventory. In the Crazy Eddie fraud, Eddie Antar “borrowed” merchandise from cooperating suppliers to boost… …Accounting Fraud in U.S. Companies 38 inventory. Besides, Antar’s underlings shipped stock from one store to another overnight, so that it could be… …auditors. “Where were the auditors?” was a question posed repeatedly when the public learned of the Crazy Eddie fraud. The auditors did not detect the… …doctored numbers, and were later sued for malpractice (see Wells 2000, pp. 91–95): Accounting Fraud in U.S. Companies 39 – They had not… …inventory observations were conducted, the auditors inadver- tently contributed to the fraud. For example, rather than climb over boxes in the warehouse…

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  Case 4: MiniScribe (1989)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …Accounting Fraud in U.S. Companies 42 Case 4: MiniScribe (1989) The downfall of MiniScribe Corp., resulting from a major accounting fraud… …inventory and sales figures (see WSJ September 11, 1989): Accounting Fraud in U.S. Companies 43 – Although many companies accelerate shipments… …auditors had test-counted. Thus, they were able to inflate the number of items that the auditors had not sampled. Accounting Fraud in U.S. Companies… …. MiniScribe’s auditor, Coopers & Lybrand (now part of PricewaterhouseCoopers), was also sued by investors for its part in the fraud. The suits charged that the… …1992 settlement, it agreed to pay a total of USD 140 million for failing to detect the accounting fraud committed by MiniScribe. In July 1994, the… …amazing to see how close they could get to the num- Accounting Fraud in U.S. Companies 45 ber they wanted to hit.” A former MiniScribe manager… …the late 1980s. References: Albrecht, W. Steve / Albrecht, Chad: Fraud Examination & Prevention… …, pp. 5, 239, 246, 260 Schilit, Howard: Financial Shenanigans – How to detect accounting gimmicks and fraud in financial reports, 2nd… …, The Wall Street Journal, September 11, 1989 Fraud is Cited at MiniScribe, The New York Times, September 13, 1989 Large Award in MiniScribe Fraud Suit… …Trial for Fraud, Los Angeles Times, July 12, 1994 Wiles Convicted of Fraud in MiniScribe Case, Los Angeles Times, August 9, 1994…

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  Case 5: Phar-Mor (1992)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …Accounting Fraud in U.S. Companies 46 Case 5: Phar-Mor (1992) In 1982, Michael “Mickey” Monus and a friend, David Shapira, visited a “deep… …growing businesses in the U.S. had been committing massive accounting fraud. Investigators eventually determined that from at least 1987 through 1992… …un- covered the fraud. Phar-Mor’s board of directors insisted that it was plenty active, but fully deceived until it got a tip in late July 1992. Monus… …day, a travel agent who Accounting Fraud in U.S. Companies 47 booked flights for league players received a USD 75,000 check for WBL expenses… …activities and helped to expose an intricate accounting fraud. The fraud was carefully carried out over several years by persons at different organ-… …collusive management fraud was almost inconceivable. The perpetrators made phony journal entries to increase inventory and decrease cost of sales… …, recognized inventory pur- chases but failed to accrue a liability, and double-counted merchandise. Members of the fraud team later indicated that one reason… …the fraud was not detected by the auditors was because Phar-Mor executives knew exactly what the auditors would be looking for. They made sure that… …informed Phar-Mor in advance which stores they would visit. The Phar-Mor fraud team stocked the four selected stores correctly, and allocated the phony… …“Cookies”. The fraud team used these entries to inflate inventory and earnings. As it would not have been practical to carefully scan all the packets, the…

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  Case 6: Bausch & Lomb (1994)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …Accounting Fraud in U.S. Companies 51 Case 6: Bausch & Lomb (1994) In the early 1990s, Bausch & Lomb, Inc. was a respected American company… …estimates indicated that it might take some dis- tributors up to two years to sell the SVS lenses that CLD management was expect- Accounting Fraud in U.S… …date. The accounting scandal led to the departure of several CLD executives, and it severely tested inves- Accounting Fraud in U.S. Companies 53… …“refreshed” with the aid of APD personnel who manually altered the computer-generated aging reports. Accounting Fraud in U.S. Companies 54… …After the scheme was discovered, company management replaced all Hong Kong personnel that it held responsible for the fraud. There was no evidence that… …: Financial Shenanigans – How to detect accounting gimmicks and fraud in financial reports, 2nd edition, Boston 2002, p. 89 Securities and…

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  Case 7: Waste Management (1997)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …Accounting Fraud in U.S. Companies 55 Case 7: Waste Management (1997) The Waste Management case provides an anatomy of an accounting… …portrays an accounting fraud perpetrated by the highest-ranking officers at WMI. As the scheme unravelled in 1997, the news sent WMI’s stock value tumbling… …that the auditors played a central role in allowing the fraud to continue. Year after year, Arthur Andersen complained about the efforts to inflate… …earnings, but still approved the company’s financial statements when their objections were effectively ignored. Unlike the auditors in other fraud cases… …client too hard. Accounting Fraud in U.S. Companies 56 For example, in its 1993 audit, Andersen quantified misstatements of USD 128 mil- lion… …Charge of Client Service” for Accounting Fraud in U.S. Companies 57 Andersen’s Chicago office and served as marketing director. In this position… …. Accounting Fraud in U.S. Companies 58 “Our complaint describes one of the most egregious accounting frauds we have seen,” said Thomas C. Newkirk… …management to falsify the financial statements by plugging in the additional income needed to achieve the desired earnings for each Accounting Fraud in… …. The scheme was orchestrated and implemented by WMI’s most senior officers. The driving force behind the fraud was Dean L. Buntrock, WMI’s founder… …, Koenig, Hau and Rooney profited handsomely from the fraud, receiving performance-based bonuses based on the company’s inflated earnings, retaining their…

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