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• eBook-Kapitel aus dem Buch Accounting Fraud

  Case 19: Adelphia Communications (2002)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …Accounting Fraud in U.S. Companies 126 Case 19: Adelphia Communications (2002) The Adelphia case ranks among the biggest corporate fraud… …of all the cases. It should become a show-and-tell in all busi- ness schools as the antithesis of public company management and stewardship.” In… …resigned from management positions and the Adelphia board of directors, after a series of questionable transactions between the family and the company had… …, Adelphia filed for Chapter 11 bankruptcy protection. Accounting Fraud in U.S. Companies 127 On July 24, 2002, federal prosecutors arrested… …the Rigas entities participated jointly in a cash management system operated by Adelphia (the “CMS”). This resulted in the commingling of funds… …. Accounting Fraud in U.S. Companies 128 Adelphia deliberately shifted liabilities onto the books of unconsolidated Rigas en- tities. The company created a… …capable” a greater percentage of its cable plant that in fact had been upgraded. Accounting Fraud in U.S. Companies 129 Third, Adelphia… …While most of the fraud took its form in hidden debt and misrepresentations con- cerning operational performance, the Adelphia case is especially notable… …: Accounting Fraud in U.S. Companies 130 – The Rigases created a special accounting system to mask their personal transactions, using the company’s… …centralized cash management system (which pooled cash from Adelphia and the Rigas entities) to their personal advantage. – Many Rigas entities were so…

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  Case 20: AOL Time Warner (2002)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …Accounting Fraud in U.S. Companies 133 Case 20: AOL Time Warner (2002) AOL Time Warner Inc. was formed by the merger of AOL and Time Warner… …started to flatten. It was during this period that AOL engaged in accounting fraud to mask the fact that it was also beginning to experience a rapid… …transactions”, in which AOL and its counterparties falsely created and reported revenue Accounting Fraud in U.S. Companies 134 In September 2000, for… …parties it referred to PurchasePro entered into commercial arrangements with this company. AOL essentially paid third parties to Accounting Fraud in… …management of AOL Europe; for example, it caused its own designated directors and steering committee members to act in accordance with AOL’s directions. How-… …flow as well as under- statements of total debt). Accounting Fraud in U.S. Companies 136 The accounting irregularities at AOL occurred before… …consequence of the fraud), the merged company dropped “AOL” from its corporate name. The move was widely seen as an admission that the 2001 merger had failed… …. In December 2004, Time Warner agreed to pay the U.S. Department of Justice USD 210 million, in order to settle criminal fraud charges related to AOL… …. How- ever, it did not admit any fault. In March 2005, Time Warner announced a separate USD 300 million settlement of civil fraud charges filed by the… …to US-GAAP. In August 2005, Time Warner reached a USD 2.5 billion settlement to securities fraud litigation. The money was paid to shareholders…

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  Case 21: HealthSouth (2003)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …Accounting Fraud in U.S. Companies 143 HealthSouth worked to restore credibility under new management. Bob May, the new chairman, said that the… …company’s board “remained appalled by the multi- billion dollar fraud that took place under Mr. Scrushy’s management and the envi- ronment under which such… …HealthSouth executives charged with accounting fraud, Healthcare Financial Management, May 2003 Troubled HealthSouth Faces Medicare Fraud Investigation… …Accounting Fraud in U.S. Companies 138 Case 21: HealthSouth (2003) In 2002, WorldCom, Tyco, Adelphia and several other U.S. companies joined… …2003, the SEC charged HealthSouth and its founder, chairman and CEO, Richard M. Scrushy, with accounting fraud. SEC director of enforcement Stephen… …of Wall Street’s expectations, Scrushy would tell management to “fix it” by recording false earnings to make up the shortfall. (The conspirators also… …revenues to derive net Accounting Fraud in U.S. Companies 139 revenues, which were disclosed on the periodic reports filed with the SEC. Because… …PricewaterhouseCoopers found additional fraud and concluded that HealthSouth’s cumulative earnings were overstated by at least USD 3.8 billion. PwC’s post-mortem report… …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 22: Symbol Technologies (2004)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …Accounting Fraud in U.S. Companies 144 Case 22: Symbol Technologies (2004) To the outside world, Symbol Technologies, Inc. was an icon of… …Holtsville, New York-based com- pany was more fittingly viewed as a classic case study in accounting fraud. “This was a veritable playbook of corporate… …fraud,” the chief prosecutor, Roslynn R. Mauskopf, said. “They cooked the books every which way they could. The execu- tive misconduct was breathtaking in… …its scope.” The investigation of fraud at Symbol began in April 2001 with an anonymous letter sent to the SEC. The letter described two specific… …charged 11 former Symbol executives with securities fraud. According to the Commission, the wide-ranging deception ran from at least 1998 until early… …2003, and involved nearly the entire management team, including the CEO, CFO and senior vice presidents for operations, sales and finance. “This is a… …, they were induced to place orders by the following common features of the “Frank spe- cials” (see SEC 2004): Accounting Fraud in U.S. Companies… …manipulating raw data to match the forecasts given to analysts. Accounting Fraud in U.S. Companies 146 Cookie jar reserves Company executives also… …picked” from a 30-day “look-back period” so as to reduce the cost of the exercise to the executives. Accounting Fraud in U.S. Companies 147… …In addition to committing fraud, some of the executives engaged in efforts to cover up the misconduct and to impede the SEC’s investigation as well as…

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  Case 23: Computer Associates International (2004)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …Accounting Fraud in U.S. Companies 149 Case 23: Computer Associates International (2004) Computer Associates International, Inc. may not be… …began slowly (mainly because of the obstruction led by Computer Asso- ciates’ senior management), it steadily gained momentum in 2004. In January 2004… …participated in a scheme to inflate revenues and then lied to cover it up. He said senior management pressured him to lie, although he didn’t name names. In… …on a shenanigan called the “Extended Quarters Practice”. In September 2004, the SEC filed securities fraud charges against Computer Associates, Kumar… …, Accounting Fraud in U.S. Companies 150 when the company reported USD 557 million in revenues beyond the USD 1.047 billion it could properly claim. Thus… …unexpired portion of the old license. Accounting Fraud in U.S. Companies 151 For contracts under its pre-2000 business model, Computer Associates… …. Thus, the USD 3.7 million essen- tially amounted to hush money. In April 2006, Kumar pleaded guilty to accounting fraud charges. Along with Stephen… …sentenced to 12 years in prison for orchestrating the accounting fraud at Computer Associates; he was also fined USD 8 million. Judge Leo Glasser repeatedly… …other things, donations to tsunami relief in Sri Lanka; girls’ education programs in Accounting Fraud in U.S. Companies 152 Kenya; emergency… …225 million to a restitution fund in order to compensate victims of the fraud. It also agreed to take various steps to strengthen its corporate…

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  Case 24: AIG (2005)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …General Eliot Spitzer. “And yet, top management routinely and persistently resorted to deception and fraud in an apparent effort to improve the company’s… …Accounting Fraud in U.S. Companies 155 Case 24: AIG (2005) In his 38 years as CEO of American International Group, Inc. (AIG), Maurice… …AIG were three primary areas of fraud (see SEC 2009): – Sham reinsurance transactions with General Re Corp. (“Gen Re”), in order to make it appear… …boosted AIG’s net investment income and allowed it to improperly recognize capital gains Accounting Fraud in U.S. Companies 156 The “Gen… …a foreign subsidiary of Gen Re (a Connecticut-based holding company for global risk management operations). The transactions were structured to make… …. Accounting Fraud in U.S. Companies 157 The transactions to misstate net investment income and capital gains Another set of transactions was designed… …over securities fraud and improper accounting by paying USD 800 million in fines and disgorgement. Settlement of these issues with New York State… …authorities as well as the Department of Justice resulted in payment of another USD 800 million. Accounting Fraud in U.S. Companies 158 Eventually… …, in August 2009, the SEC announced an agreement with Greenberg to settle the accusations that he oversaw the accounting fraud at AIG. The SEC com-… …Greenberg was liable as a “control person” during the fraud, but it had not accused him of fraud directly. Under the settlement, 84 year-old Greenberg…

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  Case 25: Bernard Madoff (2008)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …its risk management processes. Be- Accounting Fraud in U.S. Companies 164 sides, the fraud continues to reverberate on Wall Street. A number of… …References: Clauss, Pierre / Roncalli, Thierry / Weisang, Guillaume: Risk Management Lessons from Madoff Fraud, www.papers.ssrn.com, April 2009… …Accounting Fraud in U.S. Companies 159 Case 25: Bernard Madoff (2008) In December 2008, as the global financial crisis continued on its… …stunning fraud that appears to be of epic proportions”, and the Economist called it “the con of the century”. Needless to say, the unprecedented scope of… …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… …appeared to believe in loyalty and Accounting Fraud in U.S. Companies 160 honesty,” said one former Madoff employee in retrospect. “Never in your… …profits generated by share trading. Eventually, Madoff admitted in this conversation that he estimated the losses from the fraud were at least USD 50… …, and charged with securities fraud. When federal agents arrived at Madoffs’ apartment, he told them: “There is no innocent explanation. I have paid… …simplicity, one of the most puzzling issues of the Madoff fraud was that the majority of the victims had an expert knowledge of financial investment: they… …Wall Street, there had been scepticism for years over how Madoff managed to pay such consistently high Accounting Fraud in U.S. Companies 161…

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  Case 29: Infomatec (Germany, 2000)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …Accounting Fraud in European Companies 177 Case 29: Infomatec (Germany, 2000) Infomatec, an Augsburg-based maker of interactive TV… …, Infomatec was a darling of Ger- many’s “Neuer Markt”. However, first came euphoria, then came fear, and finally, fraud. The founders of Infomatec, Gerhard… …Harlos and Alexander Haefele, were among the first board members of a corporation from the Neuer Markt to be arrested for allegations of fraud… …. Share- holders that had acquired Infomatec shares after the release of the incorrect publica- tion sued Infomatec as well as the company’s management team… …shareholders. The disclosures have a particular importance for both groups, since at the time of the notification only management has the details of this… …information. Accounting Fraud in European Companies 178 Although there were many attempts by single investors to sue Infomatec and the… …management team, not all of them were successful. However, in its famous “Infomatec decisions”, the German Federal Supreme Court (BGH) ruled in 2004… …for the first time that members of the management board of a public corporation can be held personally liable to shareholders for intentionally issuing… …investigation, and in October 2000 a search order was issued for the offices of Infomatec and the pri- vate homes of the management team. The managing banks… …suspicion of insider trading and stock price fraud. Haefele received a jail term of two years and nine months, and Harlos was given a two years suspended…

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  Case 30: Lernout & Hauspie Speech Products (Belgium, 2000)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …Accounting Fraud in European Companies 180 Case 30: Lernout & Hauspie Speech Products (Belgium, 2000) In 2007, ten years after Jo Lernout and… …hundreds of disgruntled investors who lined up for the opening of the nation’s biggest fraud trial, seeking to get their money back. “Lernout & Hauspie… …of sophistication of the fraud and the amount of imagination that went into it”. Speaking at a news conference in Brussels, he said the fraud… …, revenue quadrupled to Accounting Fraud in European Companies 181 USD 31 million. In 1998, revenue mushroomed to USD 212 million, more than… …½ years because of “errors and irregularities”, a term that in accounting literature often signifies fraud. Jo Lernout and Pol Hauspie, the… …, the company voluntarily de-listed from the EASDAQ. In April 2001, L&H announced that a new probe of its operations found massive fraud. The probe… …, commissioned by L&H’s new management and carried out by PricewaterhouseCoopers, found, e.g., that 70% of the USD 160 million in sales booked by the Korean unit… …of undisclosed and deceptive transactions to inflate reported revenue and, consequently, the stock price. Accounting Fraud in European Companies… …false impression of exponential growth. The LDCs had Accounting Fraud in European Companies 183 few, if any, employees, and were dependent upon… …of fraud. The revelations eventually led to an investigation by the American watchdog SEC. The Flanders Language Valley Fund N.V. Over the…

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  Case 31: Bankgesellschaft Berlin (Germany, 2001)

  Prof. Dr. Klaus Henselmann, Dr. Stefan Hofmann

  …Accounting Fraud in European Companies 186 Case 31: Bankgesellschaft Berlin (Germany, 2001) It is a spectacular tale of incompetence… …, nepotism, corruption and accounting fraud that pushed one of Germany’s biggest banks to the brink of collapse. The news magazine Der Spiegel spoke of the… …million) was also expressly dispensed with. Accounting Fraud in European Companies 187 Later, investigations revealed that Berlin Hyp chairman… …estate funds, the debts of BGB assumed ever greater proportions. In late 2000, BGB management tried to conceal the looming bankruptcy by the fictitious… …said that it had been obliged to set aside over EUR 2 billion in provisions. About half the provisions were to cover Accounting Fraud in European… …all, top management at BGB didn’t have a complete picture of what was going on at Berlin Hyp, the mortgage-lending subsidiary. As a consequence… …, management was not able to uncover the full extent of the bank’s risk exposure or to push through the necessary changes. In November 2001, the BGB board… …BGB’s risk management was insufficient and that its risk provisions had to be revised upwards. But he had sounded the alarm in vain. BGB asked him to… …in damages from BDO. Accounting Fraud in European Companies 189 The Walther report could have stopped the shenanigans years ago. But BDO… …learned from the BGB debacle was that politicians and bank risk management don’t mix well. The new BGB chairman, Hans-Joerg Vetter, put forward a plan…

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