Showing posts with label accounting fraud. Show all posts
Showing posts with label accounting fraud. Show all posts

Sunday, 24 April 2011

Dell Accounting Scandal 'Not A Happy Story' - CFO

07:42 Jas

Aug. 16, 2007    7:34 PM EST
Dell (NSDQ:Dell) Chief Financial Office Donald Carty acknowledged that some executives were fired as a result of accounting improprieties found during a lengthy internal investigation at the company, but declined to say whether all top Dell executives involved in the mess had been terminated, when he spoke during a conference call with financial analysts to talk about the matter.
The accounting irregularities, which Dell said were directed in part by unnamed, top executives at the PC maker between 2002 and 2006, will mean Dell will restate a relatively small amount of earnings - - up to $150 million - - but the company acknowledged other shoes could drop. The U.S. Securities and Exchange Commission and the U.S. Attorney for the Southern District of New York have been conducting their own investigations of Dell's accounting and financial reporting.
"This is not a happy story for Dell, nor one we are terribly proud of," Carty said.
Dell said Thursday that a year-long Audit Committee investigation of accounting issues found that executives wrongfully manipulated accruals and account balances, often to meet Wall Street quarterly financial expectations in prior years. The probe was headed by an outside law firm, Willkie Farr & Gallagher of New York, and involved an outside accounting firm, KPMG. More than five million documents were examined during the probe.
Despite acknowledging that Dell will tighten its financial controls, and that it had fired, reassigned or fined some employees as a result of the internal investigations, Carty declined three separate times to say whether all of the Dell executives involved in the matter had been purged from the company. Carty declined to name any of the executives individually.
"I think not only have I conducted a series of recommendations to the board, with respect to the remedial action . . . the Board (of Directors) has approved the remediation plan and approved the actions," Carty said when one analyst asked whether all employees involved in the accounting misconduct had been ousted. "We've taken the steps necessary to ensure this never happens again."
To another analyst, Carty said: "You've got to take this for how you decide to take it. Both the leadership team of the company and the Board feels we have absolutely taken the necessary remedial actions."
In the conference call, which lasted about a half-hour, Carty said investigators for the SEC gave the company some breathing room to finish its internal investigation and now has its findings.
"The SEC, while they didn't interrupt their activity entirely, they stood down such that they could benefit from the information that came out from the Audit Committee investigation," Carty said. "The company has met with the SEC several times to discuss the issues that were identified . . . They obviously are going to continue their process."
An SEC spokesman did not immediately return a call seeking comment.
While Dell's formal announcement and Carty both stressed the restated earnings would reflect only a fraction of the PC maker's overall business during the time in question, the timing of the accounting manipulations occurred during critical periods for Dell.
For example, the company said that the most significant accounting manipulations happened during several quarters - - including the first quarter of its fiscal 2003 year, when Dell turned in earnings of 17 cents per share compared to Wall Street consensus expectation of 16 cents; the second quarter of fiscal 2004, when Dell met Wall Street expectations exactly with 24 cents of earnings per share; the fourth quarter of fiscal 2005, when Dell turned in earnings per share of 26 cents against Wall Street expectations of 36 cents; and the second quarter of fiscal 2005, when Dell exactly met Wall Street's expectation of 31 cents per share.
"We did not maintain an effective control environment," Carty said. "Accounting adjustments came to be viewed as an acceptable device to compensate for operational shortfalls."
Carty also acknowledged that, in addition to the other accounting irregularities, there was "part of a transaction that occurred overseas where we did find evidence of fraud, revenue that had been booked that had to be undone." He stopped short of offering specifics.

Lehman Examiner Finds Fraud, Probably

07:24 Jas

Should accounting tricks be added to the long list of things that caused the financial crisis? I'm not sure. Turns out Lehman was even more leveraged than we thought. A report out on Thursday by a court appointed examiner into what went wrong at Lehman Brothers finds that the firm towards the end of its existence regularly employed accounting tricks to gussy up its financial statements at quarter end. The report is 2,200 pages and you can find a good portion of it here. The firm hid as much as $50 billion in loans a quarter in order to look like it was less leveraged than it was.  The transactions were called "Repo 105" by the bank, and were used to move loans off its balance sheet for a few days at time. Conveniently, the days the loans went missing happened to always be the days that the firm had to report its books to the public.
This seems like fraud to me. The examiner calls it "actionable" and he says the moves open Lehman and its executives up to suits from shareholders who could claim, it appears rightly so, that they were mislead. Still I am not convinced accounting played as big a role in this crisis as past ones. Here's why:
Yes, Lehman does seem to have hid some of its loans. And that means other banks were probably using this trick as well. But how much did the trick distort Lehman's books. Not much. In fact, even if Lehman had made all of its loans available for everyone to see it's not clear that any investors would have cared, or the NY Fed would have spent one more minute thinking about the firm's solvency.
That's because the vast majority of its loans and illiquid investments were out there for all to see. In fact, if you add back in the $50 billion the firm was hiding the firm's net leverage ratio moves from 12.1 to a whopping 13.8. Merrill Lynch had a leverage ration of more than three times that.
What the moves did do was to shield the firm from criticism from the likes of short-sellers like David Einhorn who claimed the situation at Lehman was getting worse, but couldn't prove it. On the margin, Lehman's accounting trick made it look like its leverage ratio was either stable or improving. Nonetheless, people like Einhorn didn't need another reason to short Lehman Brothers. They already knew something smelled at Lehman. They just didn't know what they were smelling was slightly worse than they thought.
Perhaps the biggest takeaway from this is that Sarbanes-Oxley has again proven useless in preventing corporate fraud. Accounting fraud is exactly the type of thing Sarbox was supposed to stop by beefing up corporate boards and imposing new accounting oversight all the way up to the board level. But the Lehman examiner's report says the investment bank's executives were able to keep its board in the dark. The examiner says board members appear to have had no knowledge of the "Repo 105" accounting trick. Just another sign that the true failing that caused the financial crisis was at its heart a regulatory one.


Read more: http://curiouscapitalist.blogs.time.com/2010/03/12/lehman-examiner-finds-fraud-possibly/#ixzz1KRzdPZZ9

SEC Rewards GE Accounting Fraud

07:15 Jas


Aug 2009
Today, GE was fined $50 million by the SEC for committing accounting fraud. The fraud goes back to 2002 and 2003 relating to the reporting of sales that hadn't taken place and the inflation of company profits. The total amount that GE was to have falsified was $995 million which means that the penalty equaled only 5.24% of the fraud committed. That penalty is like a processing fee or a sales tax rather than an actual penalty.
In theory, the fraud helped stop the decline in GE's stock price, which resulted in the doubling of the market capitalization from 2002 to 2007. It was a well known secret that GE utilized cookie jar accounting and other more questionable methods to smooth out their earnings. Such methods were not in conformity with GAAP accounting rules. However, since it was so common among companies at the time the practice was easily overlooked.
Now the SEC rides in on a white horse to tell us that they'll save the day. The SEC says that they'll charge GE with a crime that was committed over 7 years ago. What has changed in the last seven years that the SEC couldn't recognize then that they can suddenly recognize now? What the SEC is essentially doing in this instance is taking their share of the fraud and allowing GE to keep the rest.
If it were up to me I would penalize GE in an amount equal to the fraud committed plus an additional 5% of annual revenue so that there is less inducement to commit the crime again (what really happens is that GE gets better at covering up the fraud.) After all, GE will write off the fines as a cost of doing business and move on to bigger and better things. For all intents and purposes GE has been rewarded by the SEC for the crime committed.

General Electric pays fine in accounting fraud charge

06:34 Jas

Washington - General Electric is to pay a 50-million-dollar fine for allegedly misleading investors with false financial statements, US regulators said Tuesday. The Securities and Exchange Commission claimed that GE used improper accounting practices in four separate incidents in 2002 and 2003 to increase reported earnings or revenue.
"GE bent the accounting rules beyond the breaking point," Robert Khuzami, the agency's director of the division of enforcement, said in a statement. "Overly aggressive accounting can distort a company's true financial condition and mislead investors."
The finding comes as part of a regulatory look into the potential misuse of hedge accounting. GE corrected the violations in the course of the investigation and has not admitted or denied the SEC's allegations. The violations occurred in the firm's commercial paper funding programme and in the reporting of locomotive and aircraft engine part sales, the SEC said.
The company agreed to pay the 50-million-dollar fine to settle the allegations.
In a statement, GE said it had cooperated with the government investigation and conducted its own internal review to make sure any issues were properly addressed.
"The errors at issue fell short of our standards, and we have implemented numerous remedial actions and internal control enhancements to prevent such errors from recurring, as previously described in our SEC filings, including measures to strengthen our controllership and technical accounting resources and capabilities," the Fairfield, Connecticut-based company said.

Posted by Earth Times Staff
http://www.earthtimes.org/articles/news/280208,general-electric-pays-fine-in-accounting-fraud-charge.html

WorldCom accounting scandal

06:33 Jas


WorldCom has revealed a further $3.3bn in accounting errors, doubling the size of the accounting scandal at America's second largest long distance phone company to more than $7bn. Mark Tran explains








What did WorldCom say?
The company said an internal audit had discovered that $3.3bn in profits were improperly recorded on its books from 1999 to the first quarter of 2002. That is on top of the $3.8bn in expenses the company said it had improperly reported as capital investments. WorldCom now says it must issue revised financial statements for 2000 and 1999 as well. The revision will reduce 2000 profits by more than $3.2bn, but this may not be the end of accounting horrors as the company warned it may find more problems.
Is there a new twist to the latest disclosures?
WorldCom said most of the $3.3bn irregularity involved the manipulation of reserves. Companies set aside reserves to cover estimated losses such as uncollected payments from customers and judgements in lawsuits and other expected costs.
Are reserves normal business practice?
It is a perfectly legitimate practice, like setting aside funds for a rainy day. But reserves can be abused to create the accounting equivalent of a slush fund. If a company wanted to massage profits to meet Wall Street expectations it can transfer the necessary sums from the reserve. The suspicion is that WorldCom deliberately inflated its reserves to be able to dip into them to boost profits in order to meet profit projections.
Who is to blame?
WorldCom's chief executive, John Sidgmore, blamed the company's former chief financial officer, Scott Sullivan, and the former controller, David Myers. The two were fired for claiming $3.8bn in regular expenses as capital investment in 2001. The pair were arrested in New York, handcuffed and paraded in front of TV cameras as part of the Bush's administration crackdown on corporate crime. Charged with securities fraud, conspiracy and other charges, they face 65 years in prison. WorldCom's founder and former chief executive, Bernie Ebbers, says he was unaware of the accounting problems, and has not been charged.
What is wrong with filing expenses as investment?
Operating expenses must be subtracted from revenue immediately, while the cost of capital expenses can be spread over time. Improperly spreading operating costs inflated WorldCom's profits.
Why did WorldCom's accountants not spot the problem?
WorldCom's accountants at the time were Arthur Andersen, the same people that looked after Enron's books as well as other companies hit by accounting issues - Tyco, Global Crossing and Adelphia. Andersen accused Mr Sullivan of withholding information from them. The deputy US attorney general, Larry Thompson, said: "We have to ask where the professionals were, the accountants and the lawyers."
What is being done to get a proper accounting?
WorldCom has new accountants, KPMG, who have been asked to scour the books back to 1999. It will be virtually impossible to get an accurate picture until a comprehensive audit for the past several years is done, a process expected to last months. The company is also under investigation by the department of justice and the securities and exchange commission, the US financial regulator. WorldCom, which has been charged with fraud for allegedly hiding $1.2bn in losses, is now under bankruptcy protection.
Any other bad news?
WorldCom said it may have to write off $50bn when it restates ifs finances. One of the largest write-offs in corporate history, that would amount to the 2001 gross domestic products of Hungary and the Czech Republic. Only Time Warner's $54bn write-off was bigger.

Satyam Chief Admits Huge Fraud

05:13 Jas

http://www.nytimes.com/2009/01/08/business/worldbusiness/08satyam.html?adxnnl=1&pagewanted=print&adxnnlx=1303646950-jvE226dpDupQA1A2i0EcUA
January 8, 2009

Satyam Chief Admits Huge Fraud


Adeel Halim/Bloomberg News
Ramalinga Raju, chairman of Satyam Computer Services, resigned Wednesday after disclosing he had systematically falsified accounts of the giant outsourcing company


By HEATHER TIMMONS and BETTINA WASSENER
NEW DELHI — Satyam Computer Services, a leading Indian outsourcing company that serves more than a third of the Fortune 500 companies, significantly inflated its earnings and assets for years, the chairman and co-founder said Wednesday, roiling Indian stock markets and throwing the industry into turmoil.
The chairman, Ramalinga Raju, resigned after revealing that he had systematically falsified accounts as the company expanded from a handful of employees into a back-office giant with a work force of 53,000 and operations in 66 countries.
Mr. Raju said Wednesday that 50.4 billion rupees, or $1.04 billion, of the 53.6 billion rupees in cash and bank loans the company listed as assets for its second quarter, which ended in September, were nonexistent.
Revenue for the quarter was 20 percent lower than the 27 billion rupees reported, and the company’s operating margin was a fraction of what it declared, he said Wednesday in a letter to directors that was distributed by the Bombay Stock Exchange.
Satyam serves as the back office for some of the largest banks, manufacturers, health care and media companies in the world, handling everything from computer systems to customer service. Clients have included General Electric, General Motors, Nestlé and the United States government. In some cases, Satyam is even responsible for clients’ finances and accounting.
The revelations could cause a major shake-up in India’s enormous outsourcing industry, analysts said, and may force many large companies to investigate and perhaps revamp their back offices.
“This development is going to have a major impact on Satyam’s business with its clients,” said analysts with Religare Hichens Harrison on Wednesday. In the short term “we will see lot of Satyam’s clients migrating to competition like Infosys, TCS and Wipro,” they said. Satyam is the fourth-largest outsourcing firm after the three named.
In the four-and-a-half page letter distributed by the Bombay stock exchange, Mr. Raju described a small discrepancy that grew beyond his control. “What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of company operations grew,” he wrote. “It was like riding a tiger, not knowing how to get off without being eaten.”
Mr. Raju said he had tried and failed to bridge the gap, including an effort in December to buy two construction firms in which the company’s founders held stakes. Speaking of a “deep regret” and a “tremendous burden,” Mr. Raju said that neither he nor the co-founder and managing director, B. Rama Raju, had “taken one rupee/dollar from the company.” He said the board had no knowledge of the situation, nor did his or the managing director’s families.
The size and scope of the fraud raises questions about regulatory oversight in India and beyond. In addition to India, Satyam has been listed on the New York Stock Exchangesince 2001, and on Euronext since January of 2008. The company has been audited by PricewaterhouseCoopers since its listing on the New York Stock exchange.
Satyam has been under close scrutiny in recent months, after an October report that the company had been banned from World Bank contracts for installing spy software on some World Bank computers. Satyam denied the accusation but in December, the World Bank confirmed without elaboration on the cause that Satyam had been banned. Also in December, Satyam’s investors revolted after the company proposed buying two firms with ties to Mr. Raju’s sons.
On Dec. 30, analysts with Forrester Research warned that corporations that rely on Satyam might ultimately need to stop doing business with the company. “Firms should take the initial steps of reviewing the exit clauses in their current Satyam contracts,” in case management or direction of the company changed, Forrester said.
The scandal raised questions over accounting standards in India as a whole, as observers asked whether similar problems might lie buried elsewhere. The risk premium for Indian companies will rise in investors’ eyes, said Nilesh Jasani, India strategist at Credit Suisse.
R. K. Gupta, managing director at Taurus Asset Management in New Delhi, told Reuters: “If a company’s chairman himself says they built fictitious assets, who do you believe here?” The fraud has “put a question mark on the entire corporate governance system in India,” he said.
News of the scandal — quickly compared with the collapse of Enron — sent jitters through the Indian stock market, and the benchmark Sensex index fell more than 5 percent. Shares in Satyam fell more than 70 percent.
Just a few months ago, Mr. Raju was trying to persuade investors that the company was sound. In October, he surprised analysts with better-than-expected results, saying he was “pleased” that the company had “achieved this in a challenging global macroeconomic environment, and amidst the volatile currency scenario that became reality.”
But by late December, it seems he had little support from the board or investors, and four of the company’s directors resigned in recent weeks. Satyam recently retained Merrill Lynch for strategic advice, a move that is generally a precursor to a sale.
Mr. Raju said in his statement that he “sincerely apologized” to shareholders and employees and asked them to stand by the company. “I am now prepared to subject myself to the laws of the land and face consequences thereof,” he said.

Heather Timmons reported from New Delhi and Bettina Wassener from Hong Kong.

Dell fined $100m for accounting fraud that misled investors

05:06 Jas


Friday 23 July 2010 09:28
PC maker Dell and its chairman Michael Dell will pay fines of $100m (£65.2m) and $4m respectively to settle US Securities and Exchange Commission charges that it misled investors through false accounting to meet Wall Street expectations, the stock market regulator said yesterday.
The charges relate to fees paid between 2002 and 2006 by chipmaker Intel to remain the sole supplier of some microprocessors after Dell said it would buy chips from Intel's rival AMD. The payments represented up to 76% of Dell's operating profit, the SEC said.
"These payments, rather than the company's management and operations, allowed Dell to meet its earnings targets," the SEC said.
After Intel cut these payments, Dell again misled investors by not disclosing the true reason behind the company's decreased profitability, it said.
Together with Michael Dell, the SEC charged former CEO Kevin Rollins, and former CFO James Schneider for their roles in the disclosure violations.
It charged Schneider, former regional vice-president of finance Nicholas Dunning, and former assistant controller Leslie Jackson, with improper accounting.
Without the Intel payments, Dell would have missed the EPS (earnings per share) consensus in every quarter during the period, the SEC said, in a complaint filed in a Washington court.
The SEC alleged that Schneider, Dunning, and Jackson engaged in improper accounting by maintaining a series of "cookie-jar" reserves that it used to cover shortfalls in operating results between financial years 2002 and 2005.
Dell's fraudulent accounting made it appear that it was consistently meeting Wall Street earnings targets and reducing its operating expenses through the company's management and operations, the SEC said.
According to the complaint, Intel made exclusivity payments to Dell for Dell to not use CPUs made by AMD. These grew from 10% of Dell's operating income in financial year 2003 to 38% in 2006, and peaked at 76% in the first quarter of its financial year 2007.
When Intel cut its payments after Dell agreed to buy AMD chips, Dell's operating income in 2Q07 dropped 75%.
The SEC alleged that the accused failed to disclose the true reason for the drop.
"Michael Dell, Rollins, and Schneider had been warned in the past that Intel would cut its funding if Dell added AMD as a supplier," the SEC said. "Nevertheless, in Dell's second quarter FY 2007 earnings call, they told investors that the sharp drop in the company's operating results was attributable to Dell pricing too aggressively in the face of slowing demand, and to component costs declining less than expected."
The SEC's complaint also alleged that the reserve manipulations allowed Dell to miss-state materially its earnings and its operating expenses as a percentage of revenue, a key performance indicator, for more than three years.
The manipulations also let Dell miss-state materially the trend and amount of operating income of its key EMEA division between its third quarter of 2003 and its first quarter of 2005.
The fines settlement allows the accused to avoid admitting or denying the SEC's allegations, but all have signed consent orders to not violate federal laws.
Schneider was banned from practising as an accountant for five years, Dunning and Jackson were banned for three years.